Daily Management Review

Despite Russia's Opposition And Widespread Doubts, EU Ministers Assert That The Russian Oil Cap Will Work


Despite Russia's Opposition And Widespread Doubts, EU Ministers Assert That The Russian Oil Cap Will Work
Despite efforts by the Russian government to try and avoid sanctions and amid skepticism worldwide, ministers of the European Union (EU) believe that the latest price cap imposed on Russian seaborne oil will work. 
The EU, along with the G-7 and Australia, had come to an agreement on Friday to restrict Russian oil purchases to $60 per barrel. This is a part of the countries to work out strategies to restrict Russia's capacity to generate funds to finance its war in Ukraine.    
On Monday, the price cap went into effect. In essence, the measure states that oil produced in Russia can only be sold at or below $60 per barrel with the necessary insurance approval. The majority of insurance companies are headquartered in the G-7 countries.
Even so, Russia already has stated that it won't export oil to countries that adhere to the price limit imposed and that it is willing to reduce production in order to maintain its commodity revenues.
Furthermore, reports indicated that it has been assembling a fleet of about 100 vessels in order to avoid oil sanctions. Having its own "shadow fleet" would allow the Kremlin to sell oil without the need for insurance from the G-7 or other countries.
When asked if the oil cap could help reduce Russia's oil revenues, Irish Finance Minister Paschal Donohoe responded, "Yes, it can."
It is “the right message at the right time,” he said in an interview with a television channel.
One of the major unanswered questions is what role India and China will play in implementing this price cap.
Both countries have increased their purchases of Russian oil in the aftermath of Ukraine's invasion, and they are hesitant to agree to the cap. According to reports, India's petroleum minister said on Monday that he "does not fear" the cap and believes it will have little impact.
However, France's Finance Minister, Bruno Le Maire, stated on Monday, "I believe it is worthwhile to try."
“Then we will assess the consequences of the implementation of this oil cap,” he added.
The cap level will be reviewed in early 2023. According to the agreement reached by EU nations last week, this revision will be done on a regular basis, with the goal of keeping it "at least 5% below the average market price for Russian oil."
Over the weekend, European Commission President Ursula von der Leyen stated that the oil price cap will help the bloc stabilize energy prices. Because of the Kremlin's war in Ukraine, the EU has been forced to drastically reduce its reliance on Russian hydrocarbons.
Market participants, on the other hand, are skeptical of the policy's integrity.
In a note issued Monday, analysts at Japan's Mitsubishi UFJ Financial Group stated that the magnitude of the price cap's impact "remains ambiguous."
They added, “we have been sceptical on the practicalities of its success.”
There is a risk that countries will purchase Russian oil at the agreed-upon price but then resell it to Europe at a higher price. This would imply that Russia would continue to profit from commodity sales while Europe would be forced to pay more at a time when its economy is already slowing.
“The introduction of the cap on the price will probably not remove all the volume, some will find its way to the markets,” Angelina Valavina, head of EMEA Natural Resources and Commodities at the Fitch Group, said.
Brent crude futures and West Texas Intermediate futures both traded 0.4% higher at around $83 and $77 per barrel, respectively.
Crude futures rose in the morning after OPEC+ nations decided to maintain output targets unchanged, but fell in the afternoon.