The European Union agreed on Friday (2nd) to set a cap on Russian oil prices at $60 a barrel and could ratify the deal as soon as the weekend, paving the way for a G7 deal. EU diplomats are under tight time pressure to finalize a price cap plan ahead of sanctions on Russian crude on Dec. 5.
The purpose of the European Union’s price cap on Russian oil is to prevent Russian oil from flowing to the global market and prevent it from using oil revenues to invade Ukraine. Before the European Union proposed a price ceiling of 65 to 70 US dollars per barrel.
The deep-rooted differences within the EU have been unable to reach a consensus on the price ceiling for Russian oil, and the main reason for the EU’s disagreement is how strict the price ceiling for Russian oil should be. The latest price ceiling shows that the pressure from Poland and other countries is effective, and the price ceiling is not as “generous” to Russia as in the previous agreement.
In addition to the oil price cap, countries such as Poland have put forward a number of conditions, including allowing the price cap to be revised every two months, and another plan to ensure that any reset price cap should be kept at least below the average market price. 5%.
Polish ambassador to the European Union Andrzej Sados said in an interview with the media that the implementation of an oil price cap on Russian oil can indeed weaken Moscow’s military strengthening, and it is a good solution for Ukraine and Europe. He also said that the EU can now formally propose a written procedure for the agreement, and the target will be formally announced on Saturday (4th).
The EU’s price ceiling agreement also paves the way for a G7 agreement. After the relevant agreements of the EU are formally adopted, they still need to be approved by the G7. According to sources familiar with the matter, the price of US$60 per barrel is within the range agreed by the G7.
Most G7 countries will stop importing Russian crude oil by the end of this year, while the European Union will impose a ban on other refined petroleum products from Russia next February, while imposing caps on those commodities.
Russia has said it will not sell oil to anyone who signs on to the price cap. Russian Foreign Minister Sergei Lavrov said on Thursday that the level of the price ceiling was irrelevant. But the risk to the oil market is that if the cap is set too low, Russia could follow through on its threat to halt production, sending global prices higher.
In fact, many market participants are not optimistic about the EU’s imposition of a price ceiling on Russian oil. They believe that if the sanctions are too severe, it may cause a backlash against Europe.
The analysis believes that given the extreme inelasticity of global oil demand, even a supply-demand imbalance of hundreds of thousands of barrels per day may cause oil prices to soar, and the US Strategic Petroleum Reserve (SPR) is at a multi-decade low. Countries (OPEC+) tend to support high oil prices, and spare capacity is scarce.
In addition, the current price ceiling still cannot stop buyers such as India and Turkey from buying Russian crude oil. India’s oil and natural gas minister previously stated that he would continue to buy Russian oil.
