China and India hold the key to the success, or failure, of a price cap on Russian oil proposed by the G7. Asia’s largest oil consumers are expected to buy even more cheap Russian crude if the US-led coalition’s attempt to starve President Vladimir Putin of oil earnings to fund its war in Ukraine plays out.
But the market remains divided over whether the latest efforts to hurt Russia financially will fall flat or even backfire, accelerating a potential global recession, reports Platts.
G7 price cap alliance
Far from expecting China and India to join the G7 price cap alliance, the US hopes the price cap will expand the discount for Russian crudes on the global market giving Asian refiners additional leverage to negotiate down prices in supply talks with Russia.
Cheapening the value of Russia’s oil exports rather than stemming their flow to world markets has become the West’s key priority.
Russian crude exports remain close to pre-war levels and the value of its oil has been recovering in recent weeks due to tight markets for physical barrels. At the start of the summer, Europe’s remaining buyers of Urals crude enjoyed discounts of up to $40/b vs Dated Brent.
Russian price cap
Although still well below the pre-war discount for Russia’s key export grade to Brent of $2.5/b in January, they have halved to a $20/b discount since early August, data from S&P Global Commodity Insights shows.
Supported by strong Chinese and Indian demand, Eastern Russia’s ESPO crude blend has seen its discount to Dubai crude shrink from $25/b in July to around $5/b in early September, according to the IEA.
“Regardless of which options the countries take, the price cap helps us achieve our objectives by putting downward pressure on the cost of Russian oil exports,” the US Treasury Department’s Assistant Secretary for Economic Policy Ben Harris said Sept. 9. “Ultimately, we believe the price cap would be successful in our goal of substantially hurting Russia’s main source of revenue.”
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