Earlier this month, the 27 Member States of the European Union (EU), the members of the G7 (the United States, Canada, France, Germany, Italy, Japan, and United Kingdom) and Australia (collectively, the “Price Cap Coalition”) announced their agreement to adopt a $60/barrel price cap on seaborne Russian crude oil. The enforcement mechanism for the cap relies on the fact that companies within G7 countries control around 90 percent of maritime insurance products. Russia can either choose to sell their crude at or below the $60/barrel limit and continue to benefit from “best-in-class” G7 services, or they can take their chances with non-G7 insurance providers. According to the United States Treasury Department, those 10% of providers outside of G7 counties are “limited in scale, more expensive, and less reliable.”
By the looks of the numbers in the International Energy Agency (IEA) Oil Market Report this week, Russia was reevaluating its trade partners far before the price cap was formally announced. Russian exports of crude oil to Europe dropped by 430,000 barrels per day (bpd) to 1.1 million bpd in November, with seaborne crude exports to the EU declining by 40% to just 500,000 bpd. An even steeper drop is expected next month, since December figures will reflect the price cap taking effect.
Even with those precipitous decreases, Russia’s total oil exports rose to their highest levels since April, largely on the strength of a record 1.3 million bpd export rate to India. Prior to Russia’s invasion of Ukraine, India was a small-time purchaser of Russian crude, instead choosing to import the majority of their oil from Iraq. As the west began to shun Russian exports post-invasion, India eagerly stepped in to purchase crude at a discount.
The ban on maritime insurance services will extend to transport of Russian petroleum products on February 5th, 2023, and already the relevant parties are making anticipatory changes to their sourcing. The EU currently imports about 1 million bpd of oil products from Russia, predominantly diesel fuel. With only two months until the embargo takes full effect, Russia is still the single largest diesel supplier to the European Union. Post-embargo, the IEA anticipates “competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers.”
While the US Treasury says it is in Russia’s best interest to continue the flow of their products into the global marketplace, the Kremlin has promised to ban the sale of Russian crude to any country within the Price Cap Coalition. Thus far, according to SEB Bank’s Chief Commodities Analyst Bjarne Schieldrop, the impact of the sanctions “has been insignificant if any at all. One reason is the fact that a large portion of Russian seaborne crude oil exports already traded below the price cap.” A retaliatory Russia turning the crude oil tap completely off could drastically alter that equation.
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