New oil price cap roils global trade but India may gain
Nervous global trade channels are in for another upheaval as the developed world—the G-7 bloc of nations—has begun enforcing the oil price cap against Russia at $60 a barrel. The 27-nation European Union bloc is joining with an outright ban on Russian seaborne oil. The object,under discussion since May, is to reduce windfall oil revenue being earned by Russia and, therefore, its ability to carry on the Ukraine war. The ban also stops EU operators from insuring and financing the transport of Russian oil to third parties. This means the ability of Russia to find tankers to carry its Ural crude will become increasingly difficult. Analysts say this will reduce Russia’s oil exports to 2.4 million barrels a day (bpd), a cut of nearly 500,000 bpd. Brent crude moved up 2% to $83.5 a barrel on Tuesday, while there was a traffic jam of tankers off the Turkish coast as Ankara pushed for insurance verification.
Russia has threatened to retaliate and stop exports to those countries that support the oil price cap. Russia may also stop pipeline oil to the EU, which is not yet banned and is still a lifeline for many East European countries. Analysts say the oil price cap at $60 a barrel may not impact Russia. As it is, Russian crude is sold at a discount of $68 a barrel. Secondly, low production costs for Russian oil—between $30 and $44 a barrel—may still give enough margin to Russia to float along.
Europe will likely have to pay a heavier price in the near term. Though the 6-month long oil price cap negotiation gave time to the EU nations to arrange alternate sources, the heavy dependence on Russian crude will now make alternative oil purchases onerous as the OPEC bloc continues to cut production. On the other hand, for India, the new sanctions could be a near-term windfall. As it is, India has consistently bought Russian crude at discounted prices, rightly arguing that it can ill afford to let go of the cheaper oil source for a poor nation. Russia now has fewer options, and India can bargain for a deal even below the G7 cap of $60 a barrel. Long-term, the coming recession and falling oil demand may keep oil prices on a plateau. Or, if the Ukraine war worsens, it may be fireworks. It’s times which are difficult to predict.