Russian Oil Price Cap May Be Set At $63-64 Per Barrel

Key Insights

• G7 countries are reportedly ready to set a price cap on Russian oil at $63-64 per barrel. 
• S&P Global thinks that Russian oil supply disruptions may hit 1.5 million bpd in Q1 2023.
• The oil market will become more sensitive to price cap news closer to December 5. 

G7 Countries Work On Details Of The Price Cap Plan

Back in summer, G7 countries announced plans to impose a price-capping mechanism on Russian oil. This mechanism was expected to start working by December 5, when the EU was due to stop most imports of Russian oil due to sanctions it imposed on Russia.

The original plan implied putting pressure on Russian oil exports by cutting access to finance, transportation, and insurance for those consumers who bought Russian oil above the price cap.

At that time, the price cap remained unknown. Today, reports indicated that the cap may be set in the $63 – $64 range to keep Russia interested in producing and exporting oil.

U.S. officials have previously stated that the U.S. would not impose secondary sanctions on countries who buy Russian oil above the price cap. However, the U.S. hopes that the price cap mechanism will give consumers an important advantage in negotiations with Russia.

Russia’s Urals Oil Trades At A $24 Discount To Brent

Russian oil trades at a major discount to Brent oil due to sanctions. According to Neste, the discount reached $37 per barrel in April. The discount has started to decline in summer and settled near the $24 level. If Brent oil is trading below the $88 level and the current discount remains intact, Russia would be selling oil below the price cap level even if it chooses not to supply oil to countries that participate in the price cap scheme.

The key question is whether Russia will continue to sell oil to the EU after December 5. Russia may choose to cut its oil production and oil exports in order to avoid supplying oil to G7 countries who will impose the price cap. Back in August, we discussed that a price cap on Russian oil may lead to a massive rally.

S&P Global believes that Russia will not find enough tankers to evade the oil price cap but notes that the country may use the so-called “shadow fleet” which is serving sanctioned Iranian and Venezuelan trades. According to S&P 500 Global, Russian oil supply disruptions may hit 1.5 million bpd in the first quarter of the next year.

Traders should note that the news flow on this topic will likely intensify in the upcoming weeks. Additional details on the oil price cap mechanism may have a significant impact on the oil market, which will likely become extremely sensitive to such news closer to December 5.

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