G7 price cap on Russia oil won’t have strong impact on Moscow: analysts

The Group of seven nations are in talks to cap Russian oil at $65 and $70 a barrel — but analysts say it likely won’t have a big impact on Moscow’s oil revenues even when it’s approved.

Prices at those levels are near what Asian markets are currently paying Russia, that are at a “big discount,” said Wood Mackenzie’s vice chairman of gas and LNG research, Massimo Di Odoardo.

“Those levels of discounts are actually according to what the discounts already are out there … It’s something that does not seem, because it is placed, prefer it’s going to have any effect [on Moscow] in any respect if the value is so high.”

Russia has threatened to it’ll not supply oil to countries setting and endorsing the value cap.

“Given Russian oil (Urals) is trading at $60‑65/bbl, the proposed price cap is already compliant under prevailing market conditions,” said Vivek Dhar, Director of Mining and Energy Commodities research from Commonwealth Bank of Australia.

In a note on Thursday, he said that current Russian oil shipments face minimal disruption from the European Union denying shipping and insurance services.

He agreed that the discussed price cap won’t make much of a dent or deter Moscow in its war against Ukraine.

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

Actually, he said the value cap discussed was higher than markets were expecting.

“Oil prices finished lower overnight after the EU discussed a price cap on Russian oil between $US65‑70/bbl, the next price range than markets expected and at levels that may reduce the danger of disruptions of EU sanctions on Russian oil shipments,” Dhar said.

There was similar skepticism over the EU’s proposed cap on natural gas prices. Several EU member states locked horns over the effectiveness of capping prices at 275 euros per megawatt hour, with some saying it isn’t realistic to maintain gas prices at such high levels for therefore long.

The bloc is in search of to stop gas prices from soaring sky-high as consumers are already fighting rising cost-of-living.

G-7 policymakers have a tricky balancing act to tread.

If prices are set too high, they will probably be meaningless and risk having no impact on Russia — but when the value cap is simply too low, it may lead to a physical reduction in the provision of Russian oil onto the worldwide market, said Raymond James’ energy analyst Pavel Molchanov.

A lower cost cap “means more inflation, more consumer unhappiness, and more monetary tightening,” Molchanov identified.

“It seems to me like [the G-7] will err on the side of caution — setting it high moderately than low to avoid worsening the inflationary spiral.”

Last week, official data showed U.K. inflation jumped to a 41-year high of 11.1% in October, higher than expected, as energy prices, amongst other aspects, continued to squeeze households and businesses.

If EU members comply with the proposed cap, Dhar expects the value of oil to fall below $95 per barrel for the last quarter of 2022.

Oil prices were fractionally higher on Friday afternoon Asia time. Brent crude futures inched higher by 0.35% to face at $85.64 per barrel, while U.S. West Texas Intermediate futures climbed 0.55% to $78.37 per barrel.