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Friday June 14, 2024

EU agrees price caps on Russian oil products

By News Desk
February 05, 2023

BRUSSELS: EU member states have agreed on the level of price caps to be imposed on shipments of Russian refined oil products, which will come into effect on Sunday as part of a G7 effort to cut Moscow’s export revenues.

Ambassadors of the 27 EU states agreed at a meeting to limit the price of premium products such as diesel at $100 a barrel and that of low-end products including fuel oil at $45 a barrel.

The caps will allow shipping companies carrying Russian oil products to access western insurance and financing only if they pay less than the prescribed level.

The Swedish rotating presidency of the bloc said the agreement was important as it was “part of the continued response by EU and partners to the Russian war of aggression against Ukraine”.

More hawkish EU states, including Poland and the Baltics were successful in demanding a review of the cap level every two months, according to two officials. Other G7 states including the US are less inclined to such a mechanism given the potential instability it could cause on energy markets, officials said.

In the final agreement, ambassadors agreed to a first review by mid-March with the commission considering the impact of the cap both on the Russian budget and member states, according to a draft of the proposal. It would also take account of its effect on the market “including possible turbulences”, the document said.

The cap compares with a current market price for diesel of about $110-$120 a barrel. High-quality refined fuels such as diesel and petrol are almost always more expensive than crude, which is trading near $80 a barrel, given the additional costs of refining and handling.

But since the full-scale invasion of Ukraine diesel in particular has soared as Russia was Europe’s largest external supplier of the fuel, while many European buyers have already turned away.

The tightness in diesel markets has raised questions over whether EU buyers will be able to quickly replace the barrels they once got from Russia once sanctions create an embargo. The relatively small implied discount under the price cap for diesel is partly a reflection of concerns about tightness in the market globally, according to members of the G7 coalition.

The $60-a-barrel price cap on Russian crude imposed by the EU in December also comes with a review every two months. Spearheaded by the US, it was agreed following similar pressure from central and eastern European capitals that argued that the level had to be adjusted regularly to keep reducing Russia’s war coffers. A senior Treasury official from the US defended the crude oil price cap mechanism from criticism that it would do little to change Russian behaviour or damage its economy.

“Our intent is not to crash the Russian economy. Our intent is to force the Kremlin to choose between propping up its economy and paying for their war,” the official said.

Meanwhile, oil prices had not risen following the embargo as some analysts predicted, the official said.

“We’ve also seen positive signs that the price cap on oil is supporting our second goal of promoting stable energy [supply],” the Treasury official said, adding that global oil prices were now lower than before the crude restrictions started in early December.

One EU diplomat said that caps were a “well-balanced restrictive measure [that] will keep the price of oil and derived products low enough to reduce Russia’s income while guaranteeing access for third countries”.