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An E.U. embargo of Russian oil and the G7’s price cap take effect. An E.U. embargo of Russian oil and the G7’s price cap take effect.
(about 3 hours later)
Europe and the United States started enforcing on Monday two of the toughest measures aimed at curbing Russia’s income from oil, the principal source of cash used to fund its nearly 10-month-old war in Ukraine.Europe and the United States started enforcing on Monday two of the toughest measures aimed at curbing Russia’s income from oil, the principal source of cash used to fund its nearly 10-month-old war in Ukraine.
But there was no drastic impact on oil markets — prices were largely unchanged by late afternoon — and that was by design.But there was no drastic impact on oil markets — prices were largely unchanged by late afternoon — and that was by design.
The first measure, a price cap initiative led by the United States, sets a top price of $60 per barrel for Russian crude, and was endorsed by the Group of 7 countries, Australia, and the European Union.The first measure, a price cap initiative led by the United States, sets a top price of $60 per barrel for Russian crude, and was endorsed by the Group of 7 countries, Australia, and the European Union.
The second is an embargo that prohibits European Union countries from buying most Russian crude as of Monday. It was a step that the bloc had agreed to months ago but that was phased in with exceptions to prepare member nations.The second is an embargo that prohibits European Union countries from buying most Russian crude as of Monday. It was a step that the bloc had agreed to months ago but that was phased in with exceptions to prepare member nations.
Although some countries like Poland and Estonia were bent on punishing Russia with a far lower price cap — a move that some feared would prompt the Kremlin to slash production — the U.S. approachseeks to gradually limit Russia’s oil revenues while also providing enough financial incentive to keep the crude flowing onto the global market, avoiding oil shocks. Although some countries like Poland and Estonia were bent on punishing Russia with a far lower price cap — a move that some feared would prompt the Kremlin to slash production — the U.S. approach seeks to gradually limit Russia’s oil revenues while also providing enough financial incentive to keep the crude flowing onto the global market, avoiding oil shocks.
The price cap program prohibits firms that play a key role in servicing Russian oil exports — like Greek tanker companies and Europe-based insurers — from dealing with cargoes sold above the $60-a-barrel limit. That cap roughly matches what buyers are said to be paying for Russian crude, a discount of almost $20 a barrel from Brent crude that buyers have demanded since Moscow’s invasion of Ukraine in February.The price cap program prohibits firms that play a key role in servicing Russian oil exports — like Greek tanker companies and Europe-based insurers — from dealing with cargoes sold above the $60-a-barrel limit. That cap roughly matches what buyers are said to be paying for Russian crude, a discount of almost $20 a barrel from Brent crude that buyers have demanded since Moscow’s invasion of Ukraine in February.
The bet is that despite bluster from the Kremlin, Russia will keep pumping oil, and major customers for Russian crude, like refiners in China and India, will see a benefit in the combination of low prices and a relatively stable global oil market.The bet is that despite bluster from the Kremlin, Russia will keep pumping oil, and major customers for Russian crude, like refiners in China and India, will see a benefit in the combination of low prices and a relatively stable global oil market.
And even if those big buyers opt out of price cap regimen, “the cap will enable them to bargain for steeper discounts on Russian oil and benefit from greater stability in world oil markets,” Treasury Secretary Janet L. Yellen said on Friday.And even if those big buyers opt out of price cap regimen, “the cap will enable them to bargain for steeper discounts on Russian oil and benefit from greater stability in world oil markets,” Treasury Secretary Janet L. Yellen said on Friday.
In a safeguard against an immediate shortage of oil and a spike in prices, ships that were loaded before Monday have until Jan. 19 to legally unload their cargoes, a price-cap loophole intended to prevent loaded ships from being stranded.In a safeguard against an immediate shortage of oil and a spike in prices, ships that were loaded before Monday have until Jan. 19 to legally unload their cargoes, a price-cap loophole intended to prevent loaded ships from being stranded.
These moves are not expected to have a sudden impact on oil supplies for Europe, because the regulation has been in the works for months and so traders and shippers have had time to adjust. In particular, energy companies have already begun buying more oil from the United States, Brazil, Guyana and the Middle East. The European Union is also giving exemptions to some countries like Hungary, whose energy needs depend on flows of Russian crude by pipeline, to quell their objections to the sanctions.These moves are not expected to have a sudden impact on oil supplies for Europe, because the regulation has been in the works for months and so traders and shippers have had time to adjust. In particular, energy companies have already begun buying more oil from the United States, Brazil, Guyana and the Middle East. The European Union is also giving exemptions to some countries like Hungary, whose energy needs depend on flows of Russian crude by pipeline, to quell their objections to the sanctions.
And refined products like diesel from Russia will not be banned in Europe until February.And refined products like diesel from Russia will not be banned in Europe until February.
Governments are also trying to keep compliance requirements relatively simple to encourage shippers and others to participate rather than stay away from Russian oil as they did when Moscow started its war earlier this year.Governments are also trying to keep compliance requirements relatively simple to encourage shippers and others to participate rather than stay away from Russian oil as they did when Moscow started its war earlier this year.
Whether these bets will pay off remain to be seen. Russia has said it will not accept a price cap and has threatened to cut off supplies to countries that comply with the arrangement. If Russia followed through on such steps and restricted oil as it has natural gas flows to Europe, it could wreak havoc in the oil market markets.Whether these bets will pay off remain to be seen. Russia has said it will not accept a price cap and has threatened to cut off supplies to countries that comply with the arrangement. If Russia followed through on such steps and restricted oil as it has natural gas flows to Europe, it could wreak havoc in the oil market markets.
“These measures will undoubtedly have an impact on the stability of the global energy market,” Dmitri S. Peskov, the Kremlin spokesman, said on Monday, according to Tass, the Russian state-run news agency, referring to the embargo and price cap.“These measures will undoubtedly have an impact on the stability of the global energy market,” Dmitri S. Peskov, the Kremlin spokesman, said on Monday, according to Tass, the Russian state-run news agency, referring to the embargo and price cap.
Analysts say that Russia has been pulling together a so-called shadow fleet of some 100 old tankers to export its crude and evade the E.U. sanctions. There are doubts, however, about whether it has access to enough large tankers capable of carrying oil long distances.Analysts say that Russia has been pulling together a so-called shadow fleet of some 100 old tankers to export its crude and evade the E.U. sanctions. There are doubts, however, about whether it has access to enough large tankers capable of carrying oil long distances.
Prices gyrated in the oil markets on Monday but then slipped lower in late afternoon, down about half a percent, with Brent crude, the international benchmark, at $85.50 a barrel, and West Texas Intermediate around $79 a barrel.Prices gyrated in the oil markets on Monday but then slipped lower in late afternoon, down about half a percent, with Brent crude, the international benchmark, at $85.50 a barrel, and West Texas Intermediate around $79 a barrel.
One sanctions expert said the lengthy negotiations had produced a deal with the potential to work.One sanctions expert said the lengthy negotiations had produced a deal with the potential to work.
“I suspect the compromise that was reached gives the policy the best chance it could have to succeed,” said Edward Fishman, a senior research scholar at Columbia University’s Center on Global Policy.“I suspect the compromise that was reached gives the policy the best chance it could have to succeed,” said Edward Fishman, a senior research scholar at Columbia University’s Center on Global Policy.
Mr. Fishman, who previously led planning and the negotiation of international sanctions on Russia at the Department of State, said there were several reasons to be optimistic. One is the recent softness of oil markets, which he interpreted as meaning that Russian oil was no longer as critical to the markets as it was a few months ago. He also said the agreed $60 price was a “Goldilocks” level, not so high as to give Russia even more revenue than it is currently receiving or so low as to discourage Moscow from producing oil.Mr. Fishman, who previously led planning and the negotiation of international sanctions on Russia at the Department of State, said there were several reasons to be optimistic. One is the recent softness of oil markets, which he interpreted as meaning that Russian oil was no longer as critical to the markets as it was a few months ago. He also said the agreed $60 price was a “Goldilocks” level, not so high as to give Russia even more revenue than it is currently receiving or so low as to discourage Moscow from producing oil.
He also said that the cap’s provision to review the price level every two months, or more frequently if needed, provided the “flexibility” that historically has helped make sanctions, like those targeting Iran’s oil sales, effective.He also said that the cap’s provision to review the price level every two months, or more frequently if needed, provided the “flexibility” that historically has helped make sanctions, like those targeting Iran’s oil sales, effective.
Still, there is plenty of skepticism and confusion about these measures. For starters, analysts say, data about pricing Russian oil has become scarce in recent months. Few if any trades are reported, and prices quoted in the market “are mostly based on hearsay,” said Viktor Katona, an analyst at Kpler, a research firm that tracks shipping.Still, there is plenty of skepticism and confusion about these measures. For starters, analysts say, data about pricing Russian oil has become scarce in recent months. Few if any trades are reported, and prices quoted in the market “are mostly based on hearsay,” said Viktor Katona, an analyst at Kpler, a research firm that tracks shipping.
Helima Croft, an analyst at RBC Capital Markets, an investment bank, said that reputable shipping and insurance companies might be spooked by the risks and unknowns of the price cap and decide to steer clear.Helima Croft, an analyst at RBC Capital Markets, an investment bank, said that reputable shipping and insurance companies might be spooked by the risks and unknowns of the price cap and decide to steer clear.
“Light touch enforcement signals may not be sufficient to overcome initial unease,” she wrote in a recent research note.“Light touch enforcement signals may not be sufficient to overcome initial unease,” she wrote in a recent research note.
The G7 nations — the United States, Canada, Britain, Germany, France, Italy and Japan — have already mainly stopped buying Russian oil, so any problems with a decline in Russia’s exports may have more impact on the economies of countries like China and India, big customers that have declined to condemn Russia’s invasion of Ukraine.The G7 nations — the United States, Canada, Britain, Germany, France, Italy and Japan — have already mainly stopped buying Russian oil, so any problems with a decline in Russia’s exports may have more impact on the economies of countries like China and India, big customers that have declined to condemn Russia’s invasion of Ukraine.
The looming embargo and the price cap were the chief reasons that OPEC and its allies, including Russia, decided on Sunday to leave their quotas for oil production unchanged. The group, known as OPEC Plus, appears to have decided that there was no reason to alter its policy amid the many economic uncertainties, including a stumbling economy in China and crippling inflation globally that are fueling fears of a recession.The looming embargo and the price cap were the chief reasons that OPEC and its allies, including Russia, decided on Sunday to leave their quotas for oil production unchanged. The group, known as OPEC Plus, appears to have decided that there was no reason to alter its policy amid the many economic uncertainties, including a stumbling economy in China and crippling inflation globally that are fueling fears of a recession.
Many analysts believe Saudi Arabia, the de facto leader of the producers’ group, is seeking a price of about $90 a barrel for Brent crude. The Saudis, according to market watchers, would probably cut production, regardless of protests from Ukraine and its allies, if prices fall significantly from that level.Many analysts believe Saudi Arabia, the de facto leader of the producers’ group, is seeking a price of about $90 a barrel for Brent crude. The Saudis, according to market watchers, would probably cut production, regardless of protests from Ukraine and its allies, if prices fall significantly from that level.