Is The Price Cap On Russian Crude Working?

The price caps on Russian crude oil and refined products appear to be working, analysts and U.S. officials say.  

Russian crude is still flowing to the global markets, but buyers are paying much lower prices for Russia’s crude, which shrinks Putin’s revenues from oil exports, the mainstay of his budget. That’s essentially the dual purpose of the price cap on crude as intended by the U.S. Administration—keep the oil market well supplied and reduce revenues for Russia.  

Russia’s oil production and exports have been resilient so far, defying early expectations of a plunge in supply after the West agreed to impose sanctions on Russian oil to cut Putin’s revenues from energy sales. But Russia’s budget revenues are sinking due to the low prices of its flagship Urals blend, whose discount to Brent Crude has widened to $30 per barrel.  

Due to the low price of Urals in January, Russia’s budget was $24.7 billion (1.76 trillion rubles) into deficit in January, compared to a surplus for January 2022, as state revenues from oil and gas plunged by 46.4% due to the low price of Urals and lower natural gas exports, the Russian Finance Ministry said in preliminary estimates earlier this month. Budget revenues from energy sales – including taxes and customs revenues – plummeted last month to the lowest level since August 2020.  

Earlier this month, Russia said it would cut its oil production by 500,000 barrels per day (bpd) in March as a result of the Western sanctions and the price cap on Russian crude oil. Analysts interpreted the move as either a sign of Russia struggling to sell all of its oil or an attempt to push up oil prices.

The Russian production cut could be “a sign that Moscow may be struggling to place all of its barrels,” or “may be an attempt to shore up oil prices,” the International Energy Agency (IEA) said in its Oil Market Report for February. 

The attempt at an oil-price boost failed—prices are pressured by signs that the Fed could raise interest rates to a higher endpoint and hold them there for longer to fight sticky inflation. 

The price cap and the EU embargo “have caused costly dislocations by forcing Russia to sell oil to regions in which it would not make economic sense to ship to under normal market conditions while requiring Europe to buy crude and products from non-Russian sellers that would not normally be the obvious choice,” Henning Gloystein, Director Energy, Climate & Resources at Eurasia Group, said during a Vortexa and Eurasia Group webinar earlier this month.

“However, the measures have not so far caused significant disruptions of crude or product flows that may trigger extreme price spikes or even regional fuel shortages,” Gloystein added. 

“The oil sanctions were aimed at both capping Russian revenues and not disrupting the market. So far, that has worked,” Gloystein told The Wall Street Journal.

U.S. Assistant Secretary for Economic Policy Ben Harris said last week that the price cap was working and explained the U.S. rationale for the measure. 

“With the price cap, we are creating clear incentives for key actors in global oil markets—Russia, oil-importing countries, and market participants—to maintain the flow of Russian oil but at discounted prices. The price cap helps achieve both goals at the same time,” Harris said at the Argus Americas Crude Summit in Houston. 

This week, Deputy Secretary of the Treasury Wally Adeyemo said that the price cap “both limits Russia’s oil revenues directly and gives negotiating leverage to those who buy Russian oil without using these services, further driving down prices.” 

“And it forces Russia to choose between spending money on weapons and spending money to build its own ecosystem of services to get around the price cap.”