The European Union has taken a major step in its efforts to punish Russia for its invasion of Ukraine by introducing a ban on imports of seaborne Russian oil and oil products. The restrictions, which came into effect on February 5, are coupled with a price cap on Russian refined fuel, aimed at hurting Russian revenue while ensuring the EU fuel embargo doesn't end up driving up global diesel prices, which are already high.
A price cap has been implemented to ensure that Russian diesel and other oil products can be sold to international customers without any sharp increase in prices due to the EU embargo. The mechanism would allow European insurance and shipping firms to continue offering their services to shippers carrying Russian oil products to other regions as long as the fuel is purchased at or below an agreed cap level.
The EU ban is expected to lead to a major shift in export flows, with buyers in the Middle East and Asia likely to buy up volumes that previously flowed to Europe. There are signs that the EU’s ban on crude oil imports, alongside the price cap, is enabling buyers elsewhere in the world to demand discounts on Russian oil, hitting the Kremlin’s fossil fuel revenues. It is hoped by EU officials that the prohibition of oil products will cause a similar decrease in the revenue generated by Russian exports.
Russia has responded to the sanctions by announcing that it will cut its oil production by 500,000 barrels a day, or about 5%, next month. This move is the first major indication of an impact on Russian production since a swath of sanctions was placed on the country’s output over the last three months.
In December, the G7 and EU had come to an agreement to limit the cost of a barrel of Russian crude oil to $60 (55 euros). The countries are aiming to impede Russia from gaining significant revenue from their oil exports, similar to what they achieved in the latter part of last year. The European Commission proposed that the new sanctions measure in the European Union will commence as soon as next Sunday.
It is anticipated that Russian diesel which had been previously sold to Europe will now be re-routed to Turkey, Latin American countries, and African nations. It is probable that Russian crude would be refined in nations like India and then exported to Europe in the form of diesel which is not of Russian origin.
In December, a $60 price cap on Russian crude oil was agreed upon, in conjunction with a similar EU import ban, for the purpose of capping the prices of petroleum products.
0. “Oil advances as Russia cuts output citing Western sanctions” Seeking Alpha, 10 Feb. 2023, https://seekingalpha.com/news/3934691-oil-advances-as-russia-cuts-output-citing-western-sanctions
1. “Is the EU ready for life without Russian diesel?” DW (English), 3 Feb. 2023, https://www.dw.com/en/is-the-eu-ready-for-life-without-russian-diesel/a-64600376
2. “EU reaches agreement on Russian oil products price cap” POLITICO Europe, 3 Feb. 2023, https://www.politico.eu/article/eu-reaches-agreement-on-russian-oil-products-price-cap/
3. “Oil a big winner on the day as Russia says that it would cut production in March” ForexLive, 10 Feb. 2023, https://www.forexlive.com/news/oil-a-big-winner-on-the-day-as-russia-says-that-it-would-cut-production-in-march-20230210
4. “Brent Oil Jumps Above $86 After Russia Says It Plans Output Cut” Yahoo News, 10 Feb. 2023, https://news.yahoo.com/brent-oil-jumps-above-85-083312029.html
5. “Asia prepares for two-way oil product flows as EU ban, price cap take effect” S&P Global, 6 Feb. 2023, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/020623-asia-prepares-for-two-way-oil-product-flows-as-eu-ban-price-cap-take-effect
6. “EU countries agree on new price cap for Russian oil” NL Times, 4 Feb. 2023, https://nltimes.nl/2023/02/04/eu-countries-agree-new-price-cap-russian-oil
7. “New Western measures aim to turn up the heat on Putin’s oil revenues. Analysts are underwhelmed” CNBC, 7 Feb. 2023, https://www.cnbc.com/2023/02/07/oil-eu-and-g-7-impose-price-caps-on-russian-petroleum-products.html