The price cap on Russian oil exports that went into effect last week to much anxiety about a possible cut in shipments has so far not elicited any dramatic response in the form of export curbs.
On the contrary, Russia is reportedly considering quite a mild response to the sanction action, per Bloomberg. Citing unnamed sources familiar with the matter, Bloomberg reported that the Kremlin’s reaction will be a decree by President Putin that will not include a floor price for the crude or a ban on shipments to specific countries.
What the decree will include, according to Bloomberg sources, will be a stipulation that Russia will not sell oil under contracts that feature a price cap clause. As the report notes, this should not have any effect on exports because buyers are not obliged to include such a clause in their contracts under the price cap regime.
Earlier this week, Russian business daily Vedomosti reported, also citing sources in the know as saying that Russia will not sell oil to countries that enforce the price cap and that it will not sell oil under contracts that mention the price cap as a condition for the sale or use of it as reference for the buying price.
According to that second report, the decree, due to be signed into law by President Putin in the next few days, would be in effect until July 2023 and will not affect contracts closed prior to December 5.
These two reports suggest that fears about an oil market disruption following the introduction of the cap may have been premature. To begin with, the stipulation that Russia will not sell oil to countries enforcing the cap is little more than symbolic.
The EU itself banned most Russian oil imports. The U.S. and the UK installed such bans earlier this year, and Japan has been exempted by both the G7 and Russia from any sanction action that would threaten its energy security. Meanwhile, Russia’s biggest buyers have made it clear that they will not enforce the cap.
The price cap itself is little more than a symbolic move, too. At $60 per barrel, the cap level is, right now, more than $10 higher than the price at which Russia’s flagship Urals is currently trading. Of course, if this changes, the price cap may—or may not—start having an actual effect on Russian oil exports, but for now, it has no real impact.
Yet Deputy Prime Minister Alexander Novak said earlier this month that Russia is ready to cut oil production if necessary in response to the cap, and this may have an impact on global oil supply, which is already constrained.
The International Energy Agency also predicted that the price cap will affect Russian oil production, shrinking it by 1.4 million bpd next year, the organization said in the latest edition of its Oil Market Report.
For now, however, Russian oil is flowing as usual, as are Russian fuels. In fact, the latter are on the rise as the EU rushes to stock up on Russian diesel before it launches its embargo on Russian fuel imports, due on February 5, 2023.
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Again, as the IEA also pointed out in its report, these are early days, and any adverse effects of the price cap—either for Russia or for oil buyers—will not make themselves obvious for a while yet. Ultimately, it will all depend on benchmark prices. If they remain at current levels, so will Russian oil. If a rally begins again, the price of Russian oil will rise, too, and then things could become more interesting.
By Irina Slav for Oilprice.com
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