Russia’s oil cap doesn’t convince traders

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Russia’s oil cap doesn’t convince traders

The Group of Seven nations imposed on Russia may finally be in place, but it doesn't convince a vital group of people: the traders who can help get the supplies onto the global market.

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From December 5, any company wanting to access G-7 services - particularly European insurance and ships - to move Russian oil can only do so if they pay $60 a barrel or less for the cargo. The initiative aims at punishing the Kremlin for the Ukraine war by reducing oil revenue while maintaining exports.

The US pushed for the measure to be a way of softerening European Union sanctions that threatened a bigger supply disruption and a surge in prices. The market is trying to figure out what effect the cap will have.

The measure is troubling traders because it doesn't fit with how physical crude shipments are purchased and valued in the real world. Wild swings on a daily, weekly and monthly basis have created challenges around risk management, which have only been exacerbated by the invasion.

Buyers will have to wait a few weeks to find out the final per-barrel price they have to pay. It could have risen to an above-cap level in that period, causing all sorts of complications.

Oil traders Bloomberg spoke about a potential risk for traders or middlemen to be stuck with above-cap cargo, giving them limited access to European ships and insurance. This poses difficulties on the physical handling of cargoes, in addition to the hedging of exposures.

John Driscoll, Chief strategist at JTD Energy Services Pte Ltd, said physical traders rarely trade on a fixed price. It is a much more complex space where they trade formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows. Purchases of Urals, ESPO and Sokol three top Russian grades are typically priced on a forward and floating basis. Their final prices aren't known until several weeks after the cargo has been bought.

Chinese refiners, which have been among the biggest buyers of Russian crude last week, agreed to pay a discount to the average front-month February ICE Brent contract, due to the recent ESPO purchases done last week. This will only be tabulated at the end of December.

Russia's ability to find buyers has been negatively affected by the cap.

Asian refiners such as Taiwan s Formosa Petrochemical Corp. welcomed the news as an opportunity for buyers to resume Russian purchases after staying on the sideline since the war. India, which has soaked up record Russian volumes in the past months, has said it will buy from wherever and isn't expecting the cap to have any impact on imports.

Russia won't cooperate with countries or entities that support the price cap on its oil. The foreign minister said it intends to negotiate directly with partners.

While Russian oil can still flow using non-EU services - such as for cargoes not bought under the cap - it is not clear if there are enough ships and insurers to handle all the shipments from Europe.

With the help of Julian Lee and Yongchang Chin.