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EU talks on Russian oil product price caps to continue this week

With the February 5th deadline looming for the setting of a price cap on oil products being exported from Russia via ships with any connection to the EU, the European Commission was reported to be considering a $100-a-barrel cap on Russian premium oil products, with $45 being the cap on discounted products like motor oils and some lubricating oils.

Talks were planed to continue this week, and a one-minute-to-midnight deal is once again a strong possibility.

Reaching an agreement on $60 a barrel cap for crude at the beginning of December was a struggle, with three different sides to the argument. These were those of the main shipping nations i.e. Greece and Cyprus; the hardline nations, i.e. Poland and the Baltic States of Lithuania, Latvia and Estonia, and the western European nations. The first group argued for as high a price as possible, while the hardliners wanted a cap low enough to almost completely strangle trade. The western European nations sat somewhere in the middle.

Unlike with the G7 Russian oil price cap, the EU is taking its own steps in banning Russian oil products. The measures include an outright EU-wide ban on imports of Russian diesel and fuel oil, plus a cap on the allowable sale price for cargoes shipped using EU services.

It is intended by the EU that the import ban will force Russian refiners to find buyers outside of Europe, increasing shipping distances and reducing product competitiveness. The price cap is intended to restrict Russia’s access to product tankers and insurance.

At $100 per barrel of diesel (equal to $2.38 per gallon), the cap would be about 25% lower than today’s European benchmark price. However, Russia is already discounting its diesel in order fill the gaps created by its existing difficulties in exporting the product to its pre-war markets in the west, so any real-world change from the cap would be less than 25%.

After February 5th Europe will have to source its diesel from somewhere else, probably the US and the Middle East – increasing the geopolitical strength of the Middle East and adding to the transport costs for European importers.

Wood Mac research director Mark Williams told CNN that “we are expecting diesel prices to rise in Europe. We’re expecting a spike sort of February, March time.”

EU diplomats also started discussions on Friday about a review of a price cap on Russian crude oil exports to third countries that the G7 and the EU put into place late last year.

The EU needs unanimous support from its member states to approve the new price caps.

The EU agreed to review its crude oil price cap level every two months, which meant the first review was supposed to have taken place earlier this month. The US and allied nations want to wait until March to undertake a review of the crude ceiling — and keep the threshold at $60 for now — because they say the new mechanism is already working to limit prices.

But a coalition led by Estonia, Lithuania and Poland is pushing to lower the crude oil price cap, which they see as too high compared to current market prices.

In a proposal shared with other member states last week, the hardliners cited estimates from the International Energy Agency that the average Russian oil market price was $54 in December and $52 in January. They are pushing to lower the cap to somewhere between $40 and $50.

“Although the price cap has shown first steps that it works, it is clearly not enough and we should exploit this mechanism further,” the countries said, adding that “as Russia is planning new attacks against Ukraine, it is of utmost importance to put stronger pressure on Russian economy and cut off its revenues.”

The countries noted that in December the EU had promised to keep the price level at least 5% below average market rates – one of its last-minute compromises agreed to in order to bring the Baltic States and Poland on board – which, they said, created a legal obligation to act now.

Although the two price caps on refined products would apply from February 5th, a grace period would be granted to vessels carrying products purchased and loaded before that date and unloaded by April 1st, according to a draft EU regulation cited by Bloomberg News.

If EU members cannot reach unanimous agreement before February 5th, the default is the “nuclear option”, a full ban on Russian petroleum products that could spike diesel prices and that of other key fuels, as well as disrupting supply

The hardliners are also arguing for a new round of sanctions on Russia because, they say, the price caps on crude oil and refined fuels effectively amount to a relaxation of the original bans. This relaxation should, they say, be balanced by stronger sanctions on Russian companies and individuals.

The measures that the Baltic states and Poland are arguing for include cutting off more banks from the SWIFT international payments system, adding restrictions on nuclear energy cooperation and banning diamonds and bitumen products.

Poland is also pushing for an extension to piped crude of the EU ban on seaborne oil from Russia, plus imposing a simultaneous system of tariffs and quotas on countries exempted from such restrictions, such as Hungary. Under current rules, European nations can still import Russian oil via the giant Druzhba pipeline system. Hungary has already indicated that it would come down heavily in opposition to any changes in these exemptions.

Poland and Germany had previously promised that they would stop using Druzhba by the end of this year, but the Polish government recently said that oil company PKN Orlen would continue to buy small amounts of Russian oil for some time. It said that the company would do so in order to avoid paying fines for terminating the contracts, in the absence of targeted sanctions.

Germany continues to use the Russian pipeline system, but says that it does so only for purchases of Kazakh oil. Poland has expressed some doubt about this, noting that while the label might say that it’s Kazakh oil, Germany might be a bit more diligent in making sure that there was no oil laundering involved.

Insurance marine news 30 Jan 2023

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