EU ministers insist it is going to work regardless of opposition from the Kremlin

G7, EU and Australia imposed a cap on Russian oil prices on December 5th. Market participants doubt the effectiveness of the measure.

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BRUSSELS – A price cap on Russian sea oil will work, EU ministers have told CNBC, despite attempts by the Kremlin to evade sanctions and broad market skepticism about the measure.

The EU, along with the G-7 and Australia, on Friday agreed to limit purchases of Russian oil to $60 a barrel as part of a concerted effort to limit Moscow’s ability to fund its war in Ukraine.

The price cap went into effect on Monday. In essence, the measure stipulates that oil produced in Russia can only be sold at a price of USD 60 or less per barrel with the necessary insurance approval. Insurance companies are mainly based in G-7 countries.

However, Russia has already said it will not sell oil to nations that comply with the cap and is willing to cut production to maintain its revenue from the commodity.

Additionally, reports suggest it has assembled a fleet of about 100 ships to avoid oil sanctions. Having its own so-called “shadow fleet” would allow the Kremlin to sell its oil without requiring insurance from the G-7 or other nations.

Asked if the oil cap can help reduce Russia’s oil revenues, Irish Finance Minister Paschal Donohoe said, “Yes, it can.”

It was “the right message at the right time,” he said in an interview with CNBC on Monday.

One of the big open questions is the role of India and China in implementing this price cap.

Both nations have stepped up purchases of Russian oil in the wake of the invasion of Ukraine and are reluctant to agree to the cap. India’s petroleum minister reportedly said on Monday that he “does not fear” the cap and expects the policy to have a limited impact.

However, France’s Finance Minister Bruno Le Maire told CNBC on Monday: “I think it’s worth a try.”

“Then we will assess the consequences of implementing this oil cap,” he added.

Market participants remain skeptical

The level of the cap will be reviewed in early 2023. This revision is made regularly and is set to be “at least 5% below the average market price for Russian oil,” according to the agreement reached by EU states last week.

European Commission President Ursula von der Leyen said over the weekend that capping oil prices will help the bloc stabilize energy prices. The EU was forced to abruptly reduce its dependence on Russian hydrocarbons because of the Kremlin war in Ukraine.

However, market participants remain suspicious of the integrity of the policy.

Analysts at Japan’s Mitsubishi UFJ Financial Group said in a note on Monday that the extent of the impact of the price cap “remains ambiguous”. They added, “We were skeptical about the practical aspects of his success.”

There is a risk that nations will buy Russian oil at the agreed cap but then resell it to Europe, for example, at a higher price. This would mean that Russia would still be making money from commodity sales, while Europe would be paying more at a time when its economy was already slowing.

“The imposition of the price cap is unlikely to remove all volume, some will find its way into the markets,” Angelina Valavina, head of EMEA natural resources and commodities at Fitch Group, told CNBC’s Street Signs Europe on Monday. .

Oil prices were trading higher in London on Tuesday morning.

Both international benchmark Brent crude futures and West Texas Intermediate futures traded 0.4% higher at around $83 a barrel and $77 a barrel, respectively.

Crude oil futures traded higher on Monday morning after OPEC+ nations decided to leave production targets unchanged, but fell in afternoon trade.