EU ministers insist it will work despite Kremlin opposition

The G7, the EU and Australia put in place a cap on Russian oil prices on December 5. Market players doubt the effectiveness of the measure.

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BRUSSELS – A price cap on Russian maritime oil will work, EU ministers tell CNBC, despite attempts by the Kremlin to evade sanctions and a market skepticism above the measure.

The EU, alongside the G-7 and Australia, agreed on Friday to limit Russian oil purchases to $60 a barrel as part of a concerted effort to limit Moscow’s ability to finance its war in Ukraine.

The price cap went into effect on Monday. Essentially, the measure states that oil produced in Russia can only be sold with the necessary insurance approval at $60 a barrel or less. Insurance companies are mainly based in G-7 countries.

However, Russia has already declared that it will not sell oil to countries respecting the cap and that it is ready to cut production to maintain its income from the raw material.

Additionally, reports suggested that he built up a fleet of about 100 ships to avoid oil sanctions. Having its own so-called “shadow fleet” would allow the Kremlin to sell its oil without needing assurances from the G-7 or other nations.

When asked if the oil cap could help reduce Russia’s oil revenues, Irish Finance Minister Paschal Donohoe replied: “Yes it can.”

It’s “the right message at the right time,” he said in an interview with CNBC on Monday.

One of the big open questions is the role of India and China in implementing this price cap.

Both countries increased their purchases of Russian oil following the invasion of Ukraine, and they are reluctant to accept the cap. India’s oil minister reportedly said on Monday that he “do not fear” the beanie and he expects the policy to have limited impact.

However, French Finance Minister Bruno Le Maire told CNBC on Monday, “I think it’s worth a try.”

“Then we will assess the consequences of putting this oil cap in place,” he added.

Market players remain skeptical

The level of the ceiling will be reviewed at the beginning of 2023. This review will be carried out periodically and the objective is to set it “at least 5% below the average market price of Russian oil”, according to the agreement concluded by the countries of the EU last week. .

European Commission President Ursula von der Leyen said over the weekend that limiting oil prices would help the bloc stabilize energy prices. The EU was forced to drastically reduce its dependence on Russian hydrocarbons because of the Kremlin war in Ukraine.

Market participants, however, remain suspicious of the integrity of the policy.

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Analysts at Japanese financial group Mitsubishi UFJ said in a note on Monday that the extent of the price cap’s impact “remains ambiguous.” They added: “We were skeptical of the practicalities of its success”.

There is a risk that nations will buy Russian oil at the agreed cap but then resell it at a higher price to Europe, for example. This would mean that Russia would still earn money from commodity sales while Europe would pay more at a time when its economy is already slowing.

“The introduction of the cap on the price is unlikely to remove all the volume, some will find its way to the markets,” Angelina Valavina, head of natural resources and commodities EMEA at Fitch Group, told Street Signs on Monday. Europe” from CNBC. .

Oil prices rose Tuesday morning in London.

International benchmark Brent and West Texas Intermediate futures traded up 0.4% to around $83 a barrel and $77 a barrel respectively.

Crude futures traded higher on Monday morning following the decision by OPEC+ countries to keep production targets unchanged, but fell in afternoon trading.

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