Analysis: G7 Russian oil price cap evolves from revenue squeeze to market anchor

WASHINGTON, December 6 (Reuters) – When U.S. officials first floated the idea of ​​capping Russian oil exports in response to a planned European embargo in March, they promised to pump the revenue into Russia’s war machine, while at the same time to avoid the destructive rise in oil prices.

But keeping Russian oil on the market and lowering global prices soon became the biggest priority as oil prices rose, people familiar with the development of the mechanism and energy analysts said.

The $60 price cap on offshore crude oil imposed by the G7 democracies and Australia on Monday highlights this, based on current market prices.

Analysts said that less would have an immediate impact on the oil revenues that Moscow currently earns. Russia said on Monday it would not stop funding its “special military operation” in Ukraine.

Ben Cahill, an energy security expert at the Center for Strategic and International Studies in Washington, said the price hike is “an unhappy deal that will do very little to reduce Russia’s oil revenues” from current levels.

“I really think that the main goal of the US Treasury was to reduce the restrictions on shipping, insurance and EU services that are part of the sanctions on Russian oil exports,” Cahill said.

Russia’s Urals crude for European delivery averaged $55.97 on Tuesday, below the benchmark and down from $61.35 on Sunday.

Brent crude oil prices fell below $80 to their lowest level since January on Tuesday, as growing concerns over global demand erased any major impact of the price hike on Russian oil sales.

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U.S. Treasury officials, the driving force behind the G7 price cap, have tried to balance cutting Russian revenues and maintaining supply, although market prices have sometimes influenced that, a senior Treasury official told Reuters.

“There have been times when Brent has changed a lot over the past eight months, where we have been concerned about one over the other, but in general, we have created this to be two goals of equal importance.”

The official said that the price cap “fixes” the current market declines, and argued that the plans for the quota are responsible for the decline in oil prices in the past few months.

At the same time, analysts attribute the decrease in global oil prices to the weakening of the global economy, the containment of COVID-19 in China and the decision of the OPEC + group to maintain constant production.

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Bob Yawger, director of energy futures at Mizuho in New York, said that at current price levels, Russia will receive $10 billion to $15 billion in oil export revenue per month.

This is far less than the more than $21 billion that Moscow earned in June as Brent topped $120, according to International Energy Agency (IEA) estimates.

At the current oil price level, Russia is profiting in the same way that it started to raise prices before the talk of the invasion of Ukraine. Russia earned about $15 billion in June and July 2021, before increasing Russian troops near Ukraine.

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The $60 price range was approved on Friday after intense debate. Poland, Lithuania and Estonia argued that EU countries, after the initial proposal of 65-70 dollars, should reduce the amount to 30 dollars, which would be closer to the cost of production in Russia.


As the price of crude oil has fallen, the price-tag language of US officials has shifted from “reducing” Russian revenues to “limiting” future cash flows.

US Deputy Treasury Secretary Wally Adeyemo said at the Reuters NEXT conference in New York on Thursday that the amount “will cause Russia to earn less revenue and have less money to invest in the conduct of war.”

“The main thing to remember is that we are starting at $60, but we have the ability to … use more prices to block Russian earnings over time,” Adeyemo said.

In July, Adeyemo said the aim was to eliminate the “risk premium”, or price increase that Russia had put into the price.

the oil market with the invasion of Ukraine, to make Moscow pay less to “pay for their war machine”.

If Moscow follows through on threats to cut production instead of selling oil to countries that are chasing supplies, prices could rise, and that’s where it becomes dangerous for the United States and its G7 allies.

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U.S. officials “want to avoid that at all costs,” Mizuho’s Yawger said, adding that it could mean “support for Ukraine suddenly starts to dry up.”


Since Russia attacked Ukraine on February 24, oil markets have changed a lot.

Estimates of the Internal Treasury at that time indicated that with the European Union’s embargo and without mitigating measures, the global price of crude oil could exceed 150 dollars.

And with the IEA predicting Russian oil markets could lose 3 million barrels a day if the EU’s toughest sanctions are imposed, Barclays and Rystad Energy have warned oil could hit $200.

“Treasury’s real motivation after March is primarily to protect Russian flows from EU sanctions, which they think is not a good idea,” said a source briefed on the Biden administration’s discussions.

“They believed that if there was an increase in the price of oil, it would not only hurt us economically and politically, but it would hurt Western support for Ukraine,” in its war against the Russian army.

While the G7 implemented the plan, India and China bought heavily cheap Russian oil, and are expected to continue large purchases beyond the price, moves approved by Treasury Secretary Janet Yellen.

Reporting by David Lawder and Timothy Gardner; Additional reporting by Noah Browning in London; Editing by Heather Timmons, Marguerita Choy and Kim Coghill

Our Standards: The Thomson Reuters Trust Principles.


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