WASHINGTON, Dec 6 (Reuters) – When U.S. officials first floated the idea of capping Russian oil export prices in response to a planned European embargo in March, they pledged to cut revenue of the Russian war machine, while avoiding a devastating spike in oil prices.
But keeping Russian oil on the market and global prices low quickly became the biggest priority as oil prices surged, people familiar with the shifting mechanism and energy analysts said.
The $60-a-barrel price limit on maritime crude imposed by the G7 democracies and Australia on Monday bears this out, aligning with current market prices.
Analysts said the cap will have little immediate impact on the oil revenues Moscow currently earns. Russia said on Monday the cap would not hurt funding for its “special military operation” in Ukraine.
The price cap is “an unfortunate compromise that will do little to reduce Russia’s oil revenues” from current levels, said Ben Cahill, an energy security expert at the Center for Strategic and International Studies in Washington.
“I really think the main objective of the US Treasury was to defuse the EU embargo” on Russian oil exports, Cahill said.
Russian Urals crude mix for delivery in Europe was quoted at an average price of $55.97 on Tuesday, below the cap and down from $61.35 on Sunday.
The benchmark Brent price slipped to its lowest level since January at less than $80 on Tuesday, continuing a downward trend as growing concerns over global demand offset the bullish effects of the price cap on sales of Russian oil.
Officials at the U.S. Treasury, the driver of the G7 price cap, have sought to balance cutting Russia’s revenue and maintaining supply, though market prices have at times influenced that, a senior official told Reuters. treasury official.
“There have been times when Brent has fluctuated wildly over the past eight months where we worried about each other, but in general we created these two goals that have equal importance.
The official said the price cap “institutionalizes” current market discounts, arguing that the price cap created them.
Analysts also attribute lower global oil prices to the weakening global economy, COVID-19 lockdowns in China and the OPEC+ group’s decision to keep production stable.
PRICE, FALL IN RUSSIAN REVENUES
At the current price cap level, Russia would earn oil export revenues of around $10 billion to $15 billion a month, said Bob Yawger, director of energy futures at Mizuho in New York.
That’s far less than the more than $21 billion a month that Moscow earned in June, according to an International Energy Agency (IEA) estimate, when Brent crude rose above $120.
At current oil price cap levels, Russia is earning roughly the same amount as before talk of an invasion of Ukraine started driving prices up. Russia earned about $15 billion in June and July 2021, before Russian troop buildups near Ukraine.
The price cap level of $60 was agreed on Friday after fierce debate. Poland, Lithuania and Estonia have argued that European Union countries should lower the cap to $30, closer to Russia’s cost of production, after an initial proposal of $65-70.
FUTURE CASH FLOWS
As crude prices have fallen, the language surrounding price caps by US officials has shifted from “reducing” Russia’s revenue to “limiting” future cash flow.
U.S. Treasury Undersecretary Wally Adeyemo told the Reuters NEXT conference in New York on Thursday that the cap “will lead to Russia earning less revenue in the future and having less money to invest in conducting of the war “.
“The key thing to remember is that we start at $60, but we have the ability to … use the price cap more to limit Russia’s revenue over time,” Adeyemo said.
In July, Adeyemo said the goal was to eliminate the “risk premium”, or price increase that Russia had introduced into the
oil market with its invasion of Ukraine, to give Moscow less money to “pay for its war machine”.
If Moscow follows through on its threats to cut production rather than sell oil to countries within the cap, prices could skyrocket, and that’s where it could get tricky for the US and G7 allies. .
US officials “want to avoid this at all costs,” said Yawger of Mizuho, adding that it could mean that “suddenly support for Ukraine starts to dry up.”
AVOIDED PRICE HOOK
Oil markets have changed dramatically since March, when Russia’s invasion of Ukraine sent prices soaring.
Internal Treasury estimates at that time had shown that global crude prices could exceed $150 with the EU embargo in place and no mitigation measures.
And with the IEA predicting that oil markets could lose 3 million Russian barrels a day if the toughest EU sanctions are imposed, Barclays and Rystad Energy have warned that oil could hit $200.
The Treasury’s “real motivation after March was primarily to preserve Russian flows in the face of EU sanctions, which they don’t think is a good idea,” said a source briefed on the Biden administration’s discussions.
“They thought that if there was an oil price spike, not only would it hurt us economically and politically, but it would hurt Western support for Ukraine,” in its fight against the Russian military.
As the G7 hammered out the plan, India and China grabbed heavily discounted Russian oil and are expected to continue large purchases outside the price cap, moves Treasury Secretary Janet Yellen endorsed.
Reporting by David Lawder and Timothy Gardner; Additional reporting by Noah Browning in London; Editing by Heather Timmons and Marguerita Choy
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