Alarming news: no agreement on price cap on Russian oil

During the latest round of talks, parties have failed to reach an agreement on the European price cap to be imposed on Russian oil, and time is running out. Unless a price cap is agreed on, next week may see the introduction of an all-out embargo.

ECONOMY NOVEMBER 30. 2022 11:10

There is no sign of an EU deal on the price cap to be imposed on Russian oil, even though the clock is ticking. If there is no price limit, then the previous agreement will come into effect: immediate and full embargo on Russian crude oil as of 5 December, and on petroleum products as of 5 February, writes the Hungarian Vilaggazdasag based on Reuters’ report, citing Polish diplomats.

Citing Polish diplomats is no coincidence, since negotiations on the price cap failed due to resistance from the Poles, and the meeting of the EU ambassadors on Monday did not yield any results either.

The group of eastern Baltic countries headed by Poland insisted that the price ceiling at 65-70 US dollars proposed by Brussels was too high, given that the price of Russian Urals crude oil stands at exactly this level, trading some 20 dollars cheaper than Brent crude as an outcome of the sanctions. Such a cap would not cause loss to the Russians, the European diplomat told Reuters, adding that Russian oil producers are breaking even at 12-20 dollars.

With a vested interest in oil shipping, Cyprus, Malta and Greece are holding out for either a higher price, or some compensation for the losses the shipping industries may suffer.

„There is no deal. The legal texts have now been agreed, but Poland still can’t agree to the price,”

Reuters quoted an ambassador as saying after Monday’s meeting had stalled. The opinions are so far apart that, according to diplomats, no date has been set for new talks while the price mechanism is to come into effect on 5 December.

The embargo coming into effect instead of the oil price cap is a scenario that Europe wanted to avoid, at the Washington’s recommendation, for that matter.

Russia supplies no less than one-tenth of the world’s oil production of around 100 million barrels a day, and a few percentage points falling out of production can cause huge hikes in oil prices.

Currently, since oil prices have seen a drastic drop in recent weeks – Brent, for example, went from nearly 100 dollars to around 80 – the ceiling proposed by Brussels would not really mean a change for the Russians, because the price of Russian Ural is not higher.

If, on the other hand, the price of Russian oil were to be slashed by the cap, two concerns could arise: If less oil enters the world market, it can drive up prices.

At the same time, it is questionable to what extent the price cap can be enforced. The plan’s masterminds, the G7 group of countries, envisioned its implementation by denying basic services, such as insurance, to more expensive shipments. At the same time, there is no guarantee that the rules will not be circumvented, for example, by „repackaging” Russian oil with online affiliates, and it is possible that the oil will still reach European customers, only at a higher price than currently.

As far as Hungary is concerned, it had previously managed to obtain an exemption from the embargo for pipeline transport, which is the only possible delivery route for Hungary, as the country has no sea ports. However, changes in the European supply and the price of oil and oil products can also have an influence on Hungarian energy bills, especially if the country should need additional imports, Vilaggazdasag writes.

The European oil embargo is just one of the big factors that’s weighing on the oil market and shaping the prices.

The recent drop in the price of oil was largely due to the fact that, besides recession fears growing in developed countries amidst interest rate hikes by central banks, China’s huge economy has also been hit by the impact of protests in recent days due to the government’s strict pandemic policies. The price of oil jumped almost two dollars on Tuesday – Brent to above $85 – as hopes grew that Beijing would relax its lockdown rules.

The other big question is what the OPEC+ group of oil-producing countries will in response to the price drop, knowing that it does not necessarily view the developed countries’ price-restricting efforts with too much sympathy. According to analysts at Saxo Bank, the reversal of the trend was also caused by

the large and, in their opinion, unjustified plummet, which may spur OPEC+ to consider a larger supply cut at its meeting next week.




crude oil, europe, russia