World Bank: Russian crude price cap 'appears increasingly unenforceable'

The global finance institution’s Commodity Markets Report October 2023 assessed that the official Urals benchmark price averaged more than US$80/bbl in the month of August despite a US$60 per barrel cap on seaborne exports of Russian crude imposed in December 2022 by a Price Cap Coalition consisting of the G7, the European Union and Australia, in response to Russia’s invasion of Ukraine.

The World Bank report saw "increasing uncertainty regarding the discount at which Russian oil trades", citing opaque price quotes and further uncertainty of Urals prices due to a dwindling market share in the commodity for European brokerage houses.

"Average sale prices higher than the official Urals benchmark have been computed based on Russian customs and Ministry of Finance data (Babina et al. 2023). It seems that by putting together a ’shadow fleet’, Russia has been able to trade outside of the cap; the official Urals benchmark recently breached the cap for more than three months," the World Bank said.

In contrast, a letter in August 2023 from United States Treasury Department acting Assistant Secretary for Economic Policy Eric Van Nostrand claimed the Price Cap Coalition’s 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 assessed. 

The US Treasury’s letter used Russian Ministry of Finance figures showing government oil revenues for the first half of 2023 being nearly 50% lower than the same period in 2022. As evidence of its policy ’success’, the US Treasury cited lower-income nations continuing to import Russian crude at discounted rates, as energy inflation eased across Europe and the United States.

Pointing to the ’substantial drawdowns’ of strategic reserves of oil that the US and others initiated during the early months of Russia’s ongoing war against neighbouring Ukraine to calm markets, the World Bank report predicted that those stockpiles, while still ’adequate’, would only start to be replenished in an oil price environment of US$70/bbl and below. With the US’ Brent crude oil benchmark prices hovering in the mid-US$80 range, the World Bank forecast an average of US$84/bbl for 2023, as compared to nearly US$100/bbl in 2022. If OPEC+ nations shelve their recent voluntary production cuts in 2024 and increase production, oil prices would likely drop slightly in 2024 and again in 2025 but remain above US$70/bbl, the report projected.

The World Bank cautioned that its outlook for oil prices is, in addition to the assumed production increase from OPEC+ states, based on assumptions of no wider escalation of the more recent conflict between Israel and Hamas. 

With Israel’s ground offensive in Palestinian territories now underway, Investment bank Investec’s head of commodities Callum Macpherson has said the possibility for further escalation becomes more likely but that there have been "no obvious signs of such escalation thus far".

“The oil market has been broadly softer reflecting the apparently reduced risk of impact on oil supply. On top of that, US figures published yesterday afternoon showed record levels of US crude output, while Chinese Manufacturing PMI data indicated contraction. These data helped Brent fall towards US$85/bbl as a consequence," Mr Macpherson said.

“However, tensions remain high across the region. Saudi Arabia’s military has reportedly gone into a state of high alert due to clashes with Yemen’s Iran-backed Houthi rebels, and the Israeli military has deployed missile ships to the Red Sea yesterday to ’strengthen the defence effort in the area’. There have also been exchanges of fire between Israeli forces and Hezbollah across the Lebanese border. So, it might be premature to downplay the risks of the war. What seems clearer though, is that if there is no escalation or other threat to output from the war, oil may struggle to sustain prices around recent highs without support from OPEC+ into 2024, making their meeting later this month crucial.”