US says Russian oil price cap is working; Russia signals production cuts

In December 2022, the G7, the European Union and Australia imposed a US$60 per barrel cap on seaborne exports of Russian crude in response to Russia’s invasion of Ukraine.

The coalition’s move was part of wider sanctions against Russian businesses that ban western companies from providing crucial services ranging from insurance, financing and transport for oil sold above the price cap.

Former head of research and managing director at investment firm BlackRock, Mr Van Nostrand said, “Our approach has struck at the heart of the Kremlin’s most important cash cow. Russian oil is trading at a significant discount to Brent oil, limiting the revenue Russia makes on each barrel it sells.”

The letter pointed to Russian Ministry of Finance figures showing government oil revenues for the first half of 2023 are nearly 50% lower than the same period a year prior.

Claiming ’success’ for the price cap and noting that Brent crude prices “of course, did not reach US$150 per barrel”, the letter maintained the cap allowed markets to remain stable while restricting Russian energy revenues.

As evidence, the US Treasury pointed to lower-income nations continuing to import Russian crude at discounted rates, while energy inflation eases across Europe and especially the United States, where energy prices have fallen by nearly 17% over the past year.

Mr Van Nostrand said the coalition believes its strategy is having an impact on sentiment within Russia’s political class, citing laments from senior Russian officials about the impact the price cap is having on Russia’s revenues.

Alongside the price cap on Russian crude, two further price caps were implemented on seaborne Russian refined products in February 2023. The first was a US$45 per barrel limit on discount-to-crude products including fuel oil, and US$100 per barrel discount for premium-to-crude products such as diesel.

However, Russian Urals crude traded ~US$2-3 above the US$60 cap in July. And according to BIMCO, Russian seaborne crude remained strong after growing 13% year-on-year in 2022 and despite sanctions linked to Russia’s invasion of Ukraine.

In response to the price cap, Russia said it plans to shed its oil output by half a million barrels a day (b/d) until the end of the year and announced a further cut. Russian crude output recorded a 4% month-on-month fall in June, and saw volumes fall another 16% month-on-month in July amid Russia’s planned oil production cut beginning this month, according to BIMCO’s figures.

Saudi Arabia implemented a 1M b/d production cut in July and has said it will extended that to the end of September. And this week, crude surged to a three-month high breaching US$80 per barrel.

Despite the production cuts and price increase, Mr Van Nostrand pre-empted concerns about elevated prices going forward.

“This expectation was part of the reason we set the crude oil price cap, as markets expected global prices to rise in the months after our initial implementation. But even as global oil prices have strengthened recently, the cap limits Russian revenues and continues giving non-coalition buyers additional leverage to negotiate prices down.”

Asian crude imports remained high in July driven by China and India. Russia was the top supplier to China in July with pipeline and seaborne arrivals totalling 2.04M b/d. 

A total of 27.92M b/d arrived in Asia in July, which was higher than June’s figure of 27.53M b/d.