G-7 Eyes Price Caps for Russian Refined Petroleum Products

The Group of Seven nations are aiming to design two price caps for Russian refined petroleum products, one for those that trade at higher prices than crude, and one for those that sell at a discount. This was according to an official statement.
The European Union is set to ban the import of refined Russian products on Feb. 5 and to impose price caps on exports to third countries, which would in particular affect diesel, naphtha and fuel oil. The exact mechanisms and the price levels are still being negotiated among G-7 nations and the EU. This is part of an effort to sanction Russia for its invasion of Ukraine.
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Following a European ban on Russian crude imports on December 5, a refined products ban was put in place. This ban includes a price cap mechanism that allows European companies to finance and insure crude exports from Russia that are priced no higher than $60 per barrel.
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The system, which is designed to limit Russia's revenues while avoiding spikes in oil prices, has been successful in both respects so far, according to a G-7 official who spoke to reporters on condition of anonymity. Russia's Urals grade crude, its main export stream, was $37.80 a barrel at the Baltic Sea port of Primorsk on Friday, according to data from Argus Media. That was less than half the price of Brent futures on the same day.
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Russia is planning to try and limit oil discounts using market principles. This move is likely to be aimed at improving the country's budget revenues. Russia is one of the world's largest oil producers, and so this could have a significant impact on global oil prices.
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The refined petroleum ban is in some ways more complicated to design and implement. Diesel and kerosene have traditionally traded at premium prices compared to crude, while fuel oil has sold at a discount, the official said. However, prices have been extremely volatile over the past year.
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Some European officials have been worried about a shortage of diesel supplies as the year goes on, but a G-7 official said the market should be flexible enough to adapt.
Russian diesel that is currently sold to Europe is likely to find buyers in Latin America and Africa. Meanwhile, Europe is likely to be able to buy diesel from the Middle East and the US, which currently sell more to Latin America and Africa. This could bring higher shipping costs since some shipments will be going over a longer distance.
It is not yet clear how Russia will respond to the new refined products policy. Previously, Moscow objected strongly to a price cap on crude oil. Russia has continued to sell oil, but the energy ministry said it would introduce new monitoring regulations aimed at helping it limit any possible price discounts that might emerge.
The EU is set to review the crude oil price cap level in mid-January, with some countries pushing for a 5% reduction. However, a G-7 official has noted that the market has already helped produce lower prices, suggesting that a formal bureaucratic change isn’t necessary.
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The official said that China and India have been able to negotiate lower crude prices with Russia since the introduction of the cap.
As oil prices continue to fall, some are wondering if a new price cap could starve Russia's war effort. QuickTake looks at the potential implications.