Western tanker insurers are concerned that they may inadvertently help ship Russian crude oil above the $60 per barrel price cap as purchases and transactions have become opaque since the G7 introduced the price ceiling in early December 2022.
Protection and indemnity (P&I) clubs have attestation that the shipments they are covering have not been bought above the price cap, but they are wary that increasingly evasive practices by Russia and its new crude customers may obscure the actual price at which Russian crude cargoes are being traded.
As international oil prices rose after the surprise OPEC+ cuts announced in early April, the price of Russia's flagship crude grade, Urals, has ticked up to approach $60 per barrel. The ESPO grade, shipped from the Russian Far East port of Kozmino, has been consistently trading above $60 per barrel ever since the EU embargo and the EU/G7 price cap came into effect on December 5.
In recent weeks, warnings from the U.S. Treasury Department have advised U.S. and other Western insurers that they may have breached the price cap mechanism in shipments out of Kozmino.
Overall, Western insurers cannot be sure whether they have covered cargoes of crude sold above $60 per barrel.
"We are definitely not able to assess the oil prices of shipments," Lars Lange, secretary general of the International Union of Marine Insurance, told Reuters this week.
Ship owners and maritime cargo insurers cannot reliably assess the actual price of a Russian cargo, Mike Salthouse, head of external affairs at NorthStandard P&I Club, told Reuters.
"If Russia wants to export its oil and sell it above the price of the price cap, then it's in the interests of both the Russian exporter and the receiver not to release information as to what the true price of the cargo was," Salthouse told Reuters. Related: Chevron Beats Profit Estimates As Refining Margins Jump
Earlier this month, the U.S. Treasury Department published a warning to U.S. companies about possible evasion of the price cap, pointing specifically to ESPO shipments from Kozmino.
"OFAC is aware of reports that ESPO and other crudes exported via Pacific ports in the Russian Federation, such as Kozmino, may be trading above the price cap and may be using covered services provided by U.S. persons," the Treasury Department's Office of Foreign Assets Control (OFAC) said.
"These U.S. service providers may be unaware that they are providing covered services involving Russian oil purchased above the price cap, as the non-U.S. persons involved in the exports may have provided incomplete or false documentation or used other deceptive practices."
Essentially all transactions for Russian crude at the Baltic Sea ports of Primorsk and Ust-Luga as well as the Black Sea port of Novorossiysk were conducted below the price cap in the first quarter of 2023. But more than 95% of crude volumes exported from Kozmino were priced above $60 per barrel, researchers at KSE Institute, a part of the Kyiv School of Economics, wrote in a report this week. The export price of Russian oil out of Kozmino averaged $73 per barrel, they noted.
"The fact that a substantial share of voyages from Kozmino involves Western-owned and/or -insured vessels while essentially all transactions show prices above $60/barrel points to potentially considerable price cap violations," the researchers at the Ukraine-based institute said.
While the sanctions regime appears to be working in reducing Putin's oil revenues—with crude oil and oil product exports down by $15.6 billion for the first quarter compared to the fourth quarter of 2022, "export prices for Russian crude oil in 2023Q1 point to sanctions violations and underscore the urgent need for more rigorous enforcement," the researchers added.
Ship owners and insurers face even more complications in handling Russian crude if the Urals price stays above $60 per barrel, as it has been for most of April, analysts say.
"If the price of Russian crude remains demonstrably over the $60 per barrel price cap, the situation can become more complicated," Erik Broekhuizen, manager of marine research and consulting at Poten & Partners, said in a recent research note.
The price cap has also spurred a rise in the 'dark' or 'shadow' fleet of oil tankers, which now includes tankers not only shipping sanctioned Iranian and Venezuelan oil, but also increasingly larger volumes of Russian oil and products.
"More than 440 tankers above 30,000 dwt tonnes, with an average age of 20 years, have been identified as solely deployed in shipping Iranian, Venezuelan and Russian oil, with beneficial owners hiding behind byzantine corporate structures," a Lloyd's List analysis showed last month.
"The number has increased by over 180 tankers in the past 12 months, as Western sanctions on Russian oil imports and shipments to third countries drive the expansion of shadowy and unregulated maritime transport."
By Tsvetana Paraskova for Oilprice.com
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In fact Russia has been selling its crude at $74 a barrel, far above the cap according to a study by American researchers at the International Finance Institute at Columbia and California universities.
Moreover, Russia neither needs Western shipping nor Western insurance. It has its own fleet of oil tankers and insurance companies.
And while Western sanctions have failed to cause even the slightest dent on Russian oil export revenue, concerns about a global banking or financial crisis did cause prices to decline and this has reduced the revenues of every oil-exporting country in the world. Russia is no exception.
However, this will be short-lived event since the fundamentals of the global oil market are robust.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert