The price of Russian crude oil has risen above a price cap set by the Group of Seven nations, in the first “real test” of whether the West can enforce one of its key sanctions against Moscow.
The benchmark price of Russian Urals crude topped $60 a barrel Wednesday, according to data from Argus Media. The breach comes eight months after the G7 and the European Union introduced the cap, preventing Western firms from providing shipping, insurance and other services needed to export Russian seaborne oil unless it is priced below the threshold.
The benchmark price was calculated based on the average price quoted by buyers, sellers and brokers who spoke with Argus Media’s analysts.
While the G7 and the EU have banned imports of Moscow’s seaborne crude, energy-guzzling nations China and India have ramped up imports of cheap Russian oil. Since most firms offering shipping services are based in Europe, the price cap was aimed at denting Russia’s revenues while still allowing its oil to flow to the global market.
“This is the first real test of the price cap sanctions,” Matthew Wright, a senior freight analyst at Kpler, told CNN.
Largely thanks to forces beyond its control, the West hasn’t needed to enforce its rules because Russian crude had been trading below $60 a barrel anyway since the price cap was introduced in December, he said.
“High interest rates, declining economic activity in China, and a potential recession in the West,” have depressed oil prices globally.
But with prices now rising, it is unclear to what extent Western authorities will be able to enforce the cap, Wright said. It will be particularly difficult to monitor which Western companies are providing services such as insurance to ships that are owned by non-G7 countries and so aren’t constrained by the cap, he added.
That market is “not as transparent,” he said. “It’s going to be very difficult to police.”
Smaller discount
In an attempt to buttress prices, oil producers in the Organization of the Petroleum Exporting Countries, in concert with Russia — an alliance known as OPEC+ — have slashed their output in recent months, tightening supply. The prices of both Urals and Brent crude, the global oil benchmark, have risen 23% and 10% respectively over the past fortnight, according to Argus Media data.
The gap between the two prices has also narrowed, indicating a smaller discount for Russian oil. A barrel of Urals crude traded at $38 on March 20, its lowest level since the start of the war in Ukraine, compared with $71 for a barrel of Brent that day. But on Thursday, a barrel of Urals crude traded at nearly $64 to Brent’s $81. That’s a 48% reduction in the gap between the two.
The smaller gap shows that the G7 price cap is “having a diminishing impact on Russian oil revenues,” Richard Bronze, co-founder and head of geopolitics at Energy Aspects, told CNN.
Also narrowing the discount, Bronze said, are traders’ increasing confidence that “Western governments are unlikely to impose more sanctions on oil flows”, the expansion of Russia’s “shadow fleet” of tankers exporting its oil around the world, and an increase in the number of non-Western maritime insurers and service providers.
Despite rising oil prices, buyers like India are unlikely to turn their backs on Russian oil, said Wright at Kpler. Moscow was the top supplier of crude to the South Asian country in May, representing 46% of imports, OPEC noted in a report Thursday, citing data from Kpler.
Instead, Wright said, “we will see more vessels which are owned outside of the EU lift Russian crude.”
“There are more than enough vessels to keep Russian crude moving,” he added.
A spokesperson for the US Treasury told CNN that “the price cap is working, and Russian [oil] revenue is down nearly 50% from a year prior.”
“It is also worth noting that Russia creating an ecosystem outside of the price cap takes resources away from its ability to fund its barbaric war,” the spokesperson added.
Production cuts
Oil is a central pillar of Russia’s economy. Before the war, revenue from taxes and export tariffs on the oil and gas sector accounted for 45% of Russia’s federal budget.
According to estimates published by the International Energy Agency Thursday, Russia’s revenue from oil exports plunged by $1.5 billion in June to almost half the level a year ago. Moscow’s oil exports fell to 7.3 million barrels a day, their lowest level since March 2021, the IEA said in its most recent monthly oil report.
In a bid to boost prices, Saudi Arabia — the world’s biggest exporter of crude oil — said last week that it would extend a production cut of 1 million barrels a day until at least the end of August. The reduction was initially planned to last only until the end of this month. The IEA said it expected Saudi Arabia to fall behind Russia as OPEC+’s top crude producer as the cuts took effect.
— Tim Lister contributed reporting.
