The EU ambassadors decided to set a price cap of $100 per barrel on oil products that trade above the price of crude oil.
EU members agreed on a restriction on the global price of Russian petroleum products
On February 3, EU members agreed on a restriction on the global price of Russian petroleum products ahead of a total import embargo on Russian oil products that took effect today, on February 5.
According to two EU diplomats, ambassadors agreed to cap the price of oil products that trade above the price of crude oil, such as diesel, gasoline, and jet fuel, at $100 per barrel. Products that sell at a lower price than oil will be limited to $45 per barrel.
On February 3, the Swedish presidency of the EU Council confirmed the agreement, two days before the EU banned all Russian oil imports.
EU ban and G7 price cap on Russian oil are designed to work together
The EU ban and the G7 price cap are designed to work together. While the EU sanctions cut off one of Russia’s most important markets for fossil fuels, the price controls are meant to keep Russian exports flowing on the world market, preventing a severe oil supply deficit or price shock.
The petroleum product price limitations follow a $60 cap on Russian crude oil agreed in December to coincide with a similar EU import embargo.
The $60 per barrel cap for Russian oil went into effect on December 5. The European Union, the G7 countries, and Australia will keep an eye on the agreed-upon maximum price for Russian tanker oil.
Can Russia avoid the price cap and embargo?
Since key international shipping and insurance companies have their headquarters in G7 countries or the European Union, the limitation may make it impossible for Moscow to sell its oil at a higher price.
Some analysts argue Russia is avoiding the price cap by deploying ships that do not depend on Western insurance or funding.
New EU ban on Russian oil is the response to Moscow’s war against Ukraine
The new EU ban on Russian diesel and other oil products is the latest economic retaliation by the EU against the Kremlin in response to Ukraine’s invasion.
Before the war, Russia supplied more than half of the EU’s diesel imports and approximately 10% of its overall diesel demand. The impending EU import embargo had raised concerns about a supply or price shock. Still, subsequent surges in imports have eased worries for the time being.
Diesel is trading at roughly $120 to $130 per barrel, so the cap is unlikely to impact Russia’s fuel export profits immediately.
On the other hand, the EU embargo is projected to cause a significant shift in export flows, with customers in the Middle East and Asia likely to acquire volumes that formerly flowed to Europe.
Oil embargo will reduce Russia’s revenue from fossil fuels
There are indications that the EU’s embargo on crude oil imports and the price cap allows customers worldwide to demand discounts on Russian oil, reducing the Kremlin’s revenue from fossil fuels.
EU authorities hope the embargo on oil goods will have a comparable impact on Russian export income, forcing Moscow to halt its war against Ukraine.