Explainer: Does the EU price cap on Russian crude matter and what does it mean?

Price ceiling comes into effect on Monday along with EU ban on oil imports from Russia

Crude oil tankers lie at anchor in Nakhodka Bay off the south-eastern coast of Russia. Reuters

The EU and the Group of Seven advanced economies (G7) have agreed to place a price cap on global purchases of seaborne Russian crude starting from Monday.

The ceiling aims to reduce Moscow’s oil and gas revenue, while maintaining adequate supplies of crude on the global energy market, preventing a surge in crude prices after an EU ban on Russian seaborne crude.

Russia, Europe’s top gas supplier and the world’s second-largest crude exporter, has continued selling discounted barrels to countries such as India and China since its invasion of Ukraine in February.

What is the price cap agreed on by the G7 and European countries?

EU member states have agreed to introduce a $60 a barrel ceiling on Russian crude imports with an adjustment mechanism to keep the cap at 5 per cent below the market price.

An initial G7 proposal of a price cap within the $65 to $70 range was rejected by several countries on the grounds of it being too high.

How will it be enforced?

The UK and the EU will also introduce a ban on maritime services that allow the transport of Russian oil, including to third countries — those that are neither Russia nor the sanctioning country.

The list of banned services includes insurance, brokerage and the EU-based tanker fleet that include vessels owned in Greece and Cyprus. These restrictions do not apply if oil is bought at or below the capped price.

Insurance is one of the key services that enables the movement of oil by sea, particularly protection and indemnity (P&I) insurance that applies to third-party liability claims.

Customarily, vessels obtain insurance cover from the London-based International Group of P&I Clubs. This group uses a reinsurance programme that is heavily dependent on the EU, necessitating that its services will only be allowed if oil is shipped under the cap.

Are there any exemptions?

The price cap will only be applicable to seaborne deliveries of Russian oil.

Natural gas flows via the key Druzhba pipeline to Europe are still permitted. The pipeline supplies several countries in Eastern and Central Europe, including refineries in landlocked nations such as Hungary and Slovakia.

An exception has been made for Kazakhstan’s main CPC crude oil blend, which is exported to global markets from a Russian port.

Bulgaria can continue to import seaborne Russian crude oil until the end of 2024, under contracts that were agreed on before June this year.

Japan, which is heavily reliant on energy imports, has received an exemption for imports from Russia’s Sakhalin-2 oil and gas project.

Will it have an impact on oil markets?

MUFG Bank has said that weak Chinese demand may limit Russia’s ability to export oil outside of the price cap regime, encouraging adherence to the $60 price ceiling set by the EU.

Russian oil exports rose to 7.7 million bpd in October — up 165,000 bpd from the previous month — on higher shipments to the EU, China and India, the International Energy Agency said.

Russia, whose Ural crude has been trading at a steep discount to Brent, has said it will not abide by the price cap set by the G7 nations on its seaborne oil, even if it has to cut production — a move that could push up oil prices.

“We believe an important decision is permitting the price cap to fluctuate with crude benchmarks, as incentives are conditional with global prices, balances and discounts,” said MUFG.

“We believe the price cap would need to rise next year, given our $105-per-barrel average 2023 Brent crude forecast.”

The EU has said the initial ceiling may be amended by the price cap coalition and that such a decision will be followed by a 90-day winding-down period for maritime-related services and transport of Russian crude.

Energy consultancy Rystad Energy said the price cap will not impact its forecast for Russian exports and crude oil production.

While the threat of losing P&I insurance will limit Russia's access to the tanker market, the country will be able to expand its fleet and restore crude export volumes by the summer, according to the Norway-based consultancy.

"Much of what happens to Russian oil exports in the coming months will depend on several factors, as many unanswered questions remain," said Rystad Energy.

"The most crucial unknown factor right now involves mainland China, India and Turkey – the current main buyers of Russian crude."

• 

  The coffin of Valeriy Krasnyan is brought out of St. Michael's Golden-Domed Monastery in Kyiv. Getty Images

• 

  Repairmen work near a residential building damaged following a missile attack in Vyshgorod, outside of Kyiv. AFP

• 

  An elderly man walks in front of a residential building damaged following a missile attack in Vyshgorod. AFP

• 

  A boy kisses a dog while he charges his phone at the heating tent dubbed a Point of Invincibly in Bucha, Ukraine. AP

• 

  A couple uses a laptop in the heating tent. AP

• 

  Workers dig out a tire from the rubble of a destroyed storage building at a grain processing center so they can use it for repairs in Siversk, Donetsk region. Reuters

• 

  The Chernihiv region found itself on the frontline of Russia's invasion in February, when Moscow's forces were attempting to quickly seize Kyiv. Getty

• 

  Russia ultimately retreated from northern Ukraine to focus its attack on the east and south. Getty

• 

  The city of Chernihiv on November 28, 2022 in Chernihiv, Ukraine. Getty

• 

  A worker fits in new windows of a building in Chernihiv. Getty

• 

  People receive food from AFAT - Disaster and Emergency Management Presidency in Chernihiv. Getty

• 

  The people Chernihiv queue up for hot food. Getty

• 

  Oleksandr Antonenko stands on a balcony of his apartment damaged by a recent Russian military strike in Kherson. Reuters

• 

  Mr Antonenko and his mother Liudmyla inside their apartment recently damaged by a Russian military strike in Kherson. Reuters

• 

  A woman walks in an underpass in Kyiv, on November 26, 2022. AFP

• 

  Friends hug after the arrival of a train in the southern city of Kherson. Getty

• 

  Residents sort through donated clothing at an aid centre in Kherson. Getty

• 

  A Ukrainian soldier stands with a machinegun near Liman in the Donetsk region. AP

• 

  Children attend a physical education class at Spilno School in Kyiv. Getty

• 

  A woman embraces her friend, a soldier in the Ukrainian army, in Kherson. AFP

• 

  Residents inspect a crater left by a Russian military strike in the village of Komyshuvakha in the Zaporizhzhia region. Reuters

• 

  Resident Tetiana Reznychenko walks past a work by world-renowned graffiti artist Banksy, on the wall of a destroyed building in the Ukrainian village of Horenka. Reuters

• 

  Ukrainian soldiers fire artillery at Russian positions near Bakhmut in the Donetsk region. AP

• 

  A fisherman sails his boat on the Dnipro as black smoke rises from an oil reserve in Kherson. AFP