An image taken on May 3, 2022 shows a general view of Slovnaft, the largest mineral oil refinery in Slovakia, in Bratislava, Slovakia. (Photo by JOE CLAMAR/AFP)
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The G7 countries are in talks to cap Russian oil at $65 and $70 per barrel, but analysts say it probably won’t have a significant impact on Moscow’s oil revenues, even if approved.
Prices at those levels are close to what Asian markets are currently paying to Russia, which has a “big discount,” said Massimo Di Odoardo, vice president of gas and LNG research at Wood Mackenzie.
“These discount levels are certainly in line with the discounts already on the market… will have any effect [on Moscow] anything if the price is so high.”
Russia has threatened that it will not supply oil to countries that set and maintain price caps.
“With Russian oil (Urals) trading at $60-65 per barrel, the proposed price cap is already in line with prevailing market conditions,” said Vivek Dhar, director of mining and energy commodity research at the Commonwealth Bank of Australia.
In a note published on Thursday, he said that the current supply of Russian oil would face minimal disruption from the European Union’s denial of shipping and insurance services.
He agreed that the price ceiling under discussion would not have a major impact and would not deter Moscow in its war against Ukraine.
“Russian offshore oil exports increased to China, India and Turkey at the expense of advanced economies after the war in Ukraine,” he added.
In fact, he said that the price cap being discussed was higher than the markets expected.
“Oil prices dropped overnight after the EU discussed a price ceiling for Russian oil in the range of $65-70 per barrel, which is a higher price range than markets expected and at levels that would reduce the risk of violating EU sanctions in regarding the supply of Russian oil”. Dhar said.
There was similar skepticism about the EU’s proposed cap on natural gas prices. Several EU member states opposed the effectiveness of the €275 per MWh price cap, with some arguing that it was unrealistic to keep gas prices at such high levels for so long.
The bloc is aiming to stop gas prices from skyrocketing as consumers are already grappling with the rising cost of living.
G7 politicians have to balance among themselves.
If prices are set too high, they will be meaningless and risk having no effect on Russia, but a price cap that is too low could lead to a physical reduction in the supply of Russian oil to the world market, Raymond James said. energy analyst Pavel Molchanov.
A lower price ceiling “means more inflation, more consumer discontent and tighter monetary policy,” Molchanov said.
“I think that [the G-7] would err on the side of caution—setting it higher rather than lower to avoid exacerbating the inflationary spiral.”
Last week, official data showed that UK inflation jumped to a 41-year high of 11.1% in October, higher than expected as energy prices continued to put pressure on households and businesses, among other factors.
Downside risks to current forecasts
If EU members agree to the proposed cap, Dhar expects the price of oil to fall below $95 a barrel in the last quarter of 2022.
Oil prices were slightly higher on Friday afternoon Asian time. Brent crude futures rose 0.35% to $85.64 a barrel, while US West Texas Intermediate crude futures rose 0.55% to $78.37 a barrel.
“Our price forecast suggests that EU sanctions, accompanied by a cap on Russian oil prices, will result in a sufficient supply disruption to offset current concerns about global economic growth.”
The European bloc has imposed several rounds of sanctions on Russia since Moscow launched an unprovoked war against neighboring Ukraine in late February.
Earlier this week, Goldman Sachs cut its oil price forecast by $10-$100 a barrel for the fourth quarter of 2022. citing growing Covid concerns in China and a lack of clarity on the G7 countries’ plan to cap Russian oil prices.