G7 value cap on Russian oil will not have an effect on Moscow a lot: analysts

Image taken on May 3, 2022 shows a general view of Slovakia’s largest petroleum refinery Slovnaft in Bratislava, Slovakia. (Photo by JOE KLAMAR / AFP)

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The Group of 7 nations is in talks to cap Russian oil at $65 and $70 a barrel – but analysts say it’s unlikely to have a significant impact on Moscow’s oil revenues even if approved.

Prices at these levels are close to what Asian markets are currently paying Russia, which is priced at a “big discount,” said Wood Mackenzie’s vice president of gas and LNG research, Massimo Di Odoardo.

“These discounts are certainly in line with the discounts that are already out there… It’s something that, as it’s placed, doesn’t look like it is will have any effect [on Moscow] it doesn’t matter if the price is so high.”

Russia has threatened it will not supply oil to countries that set and endorse the price cap.

“Given that Russian oil (Urals) is trading at $60-$65/barrel, the proposed price cap is already compliant under prevailing market conditions,” said Vivek Dhar, director of mining and energy commodities research at the Commonwealth Bank of Australia.

In a note on Thursday, he said current Russian oil supplies are facing minimal disruption from the European Union, which is refusing shipping and insurance services.

He agreed that the price cap under discussion would not greatly impede or deter Moscow from its war against Ukraine.

“Russia’s seaborne oil exports to China, India and Turkey have increased at the expense of advanced economies after the Ukraine war,” he added.

In fact, he said the price cap being discussed was higher than markets had anticipated.

“Oil prices fell overnight after the EU discussed a price cap for Russian oil between $65 and $70 a barrel, a higher price range than markets were expecting and at levels that risked disruptions from EU sanctions against Russian oil supplies.” Dhar said.

The EU’s proposed cap on natural gas prices was similarly skeptical. Several EU member states are arguing about the effectiveness of the €275 per megawatt-hour price cap, with some saying it is not realistic to keep gas prices at such high levels for so long.

The bloc is trying to prevent gas prices from skyrocketing as consumers are already grappling with rising living costs.

G-7 policymakers face a difficult balancing act.

It seems so to me [the G-7] will play it safe and keep it high rather than low to avoid worsening the inflationary spiral.

Pavel Molkhanov

Energy Analyst at Raymond James

If prices are set too high, they are meaningless and risk not having an impact on Russia – but if the price cap is too low, it could result in a physical reduction in the supply of Russian oil on the world market, Raymond James said. Energy analyst Pavel Molchanov.

A lower price cap “means more inflation, more consumer dissatisfaction and more tightening of monetary policy,” Molchanov stressed.

“It seems so to me [the G-7] will play it safe – set it high rather than low to avoid worsening the inflationary spiral.

Last week, official data showed that UK inflation rose to a 41-year high of 11.1% in October, higher than expected as energy prices, among other factors, continued to weigh on households and businesses.

Downside risks for current forecasts

If EU members agree to the proposed cap, Dhar expects the price of oil to fall below $95 a barrel for the final quarter of 2022.

Oil prices were marginally higher on Friday afternoon Asian time. Brent crude futures were up 0.35% to $85.64 a barrel, while US West Texas Intermediate futures were up 0.55% to $78.37 a barrel.

“Our price forecast assumes that EU sanctions, accompanied by a price cap on Russian oil, will cause sufficient supply disruptions to offset ongoing global growth concerns.”

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The European bloc has imposed several rounds of sanctions on Russia since Moscow launched its unprovoked war on neighboring Ukraine in late February.

Earlier this week, Goldman Sachs lowered its oil price forecast for the fourth quarter of 2022 by $10 to $100 a barrel. citing rising Covid concerns in China and a lack of clarity over the Group of Seven’s plan to cap Russian oil prices.