International oil prices continue to be under pressure, the G7 price ceiling on Russia may only be a lonely sanction
International oil prices extended overnight losses on Thursday (November 24), as the Group of Seven (G7) countries proposed a price ceiling for Russian oil in a range higher than current trading levels, alleviating market concerns about potential supply tightness. EU governments have yet to agree on this price range, and they will resume negotiations in the last two days.
At 16:41 Beijing time, NYMEX crude oil futures fell 0.21% to $77.78/barrel; ICE Brent crude futures fell 0.18% to $84.99/barrel.
Both markets fell nearly 4 percent overnight as the G7 was considering capping Russian seaborne oil prices at $65 to $70 a barrel, according to a European official. But EU governments have yet to agree on the price range, and they are due to resume talks on a price cap on Thursday or Friday (November 25).
As the G7 countries plan to impose a price ceiling on Russian oil higher than the current market level, this may attract Russia to continue to sell oil, thereby reducing the risk of supply shortages facing the global oil market. The G7, along with the entire EU and Australia, plans to impose price caps on Russian oil exports by sea on Dec. 5.
Countries dispute the price cap. Poland, Lithuania and Estonia believe that $65-70 per barrel will make Russia too profitable, as production costs are only around $20 per barrel. Countries with large shipping industries, such as Cyprus, Greece and Malta, argue the cap is too low and demand compensation for lost business or more time to adjust. If the transportation of Russian oil cargo is hindered, the latter will suffer great losses.
The range was higher than market expectations, reducing the risk of global supply disruptions, Commonwealth Bank of Australia commodities analyst Vivek Dhar said in a note. “If the EU agrees to cap oil prices at $65-70/bbl this week, we see a downgrade risk to our $95/bbl oil price forecast for this quarter.”
Dhar added that the agency’s fourth-quarter oil price forecast of $95 a barrel is based on the assumption that EU sanctions and Russian oil price caps will be enough to disrupt supply and add to global growth concerns.
Since the conflict between Russia and Ukraine broke out in February, India has replaced countries that imposed sanctions on Russian crude oil imports as the main buyer of Russian crude oil. Some Indian refiners are paying discounts of about $25 to $35 a barrel for Russian Urals crude over Brent, the sources said. Urals crude oil is Russia’s main export grade.
That hints that shippers or insurers in countries that impose sanctions on Russia will be able to continue servicing Russian crude shipments without fear of sanctions. It also means that Russia does not need to honor the threat of a cut-off to buyers who enforce the price cap, since the market price is below the cap anyway.
About 70%-85% of Russia’s crude oil is exported by tanker. The idea of the price cap is to prohibit shipping, insurance and reinsurers from handling cargoes of Russian crude globally unless they sell for more than a cap set by the G7 and its allies.
With the world’s major shipping and insurers based in G7 countries, the price cap would make it difficult for Moscow to sell its oil at a higher price. At the same time, with production costs estimated at around $20 a barrel, the cap would still make it profitable for Russia to sell oil, thereby preventing a shortage in global markets.
Chevron Corp may soon receive U.S. approval to expand operations in Venezuela and resume oil deals once the Venezuelan government and its opposition resume political talks, four people familiar with the matter said on Wednesday.
Both Venezuelan political parties and U.S. officials are pushing for talks in Mexico City this weekend, the people said. It would be the first such talks since October 2021 and could pave the way for an easing of U.S. oil sanctions on the country. Venezuela is a member of the Organization of Petroleum Exporting Countries (OPEC).
U.S. gasoline and distillate inventories both rose sharply last week, data from the U.S. Energy Information Administration (EIA) showed overnight, as refiners ramped up production, alleviating concerns about tight markets. Refinery utilization rose 1 percentage point to 93.9 of total capacity, with utilization on the East Coast hitting a record high despite a sharp drop in crude inventories.
“The EIA data added to the bearish sentiment given higher refinery utilization and the resulting build in product inventories,” said Andrew Lipow, president of Lipow Oil Associates in Houston.