OPEC+ Shock Oil Cut May Give G-7 A New Russian Oil Problem

By Alaric Nightingale, Bloomberg Markets Live reporter and analyst

Sunday’s announcement of surprise production cuts by key members of OPEC+ creates a question about where that might leave the G-7’s price cap on Russian oil sales (something ZH first discussed late on Sunday in “Anti-Russia Alliance Splinters As Japan Buys Russian Oil At Price Above Cap; Others To Follow“).

It’s important to remember that the cap is really there to allow Russian oil to flow, not to hinder it. That’s because the threshold was imposed as a means of allowing traders and companies to access key G-7 services, especially insurance, which are otherwise banned. So the higher global oil prices, the greater the theoretical pressure for the cap to guarantee that Russian barrels keep flowing.

The oil price is about where it was when then cap on crude was first imposed in early December. So there’s no obvious need to adjust it right now.

Also, Russia appears to be dumping more crude onto the global market than ever. That will presumably give the G-7 some comfort that its strategy is working. (Incidentally, Russia is supposed to have cut output by 500,000 barrels a day last month, but it’s not showing up in the loadings of tankers at the nation’s ports.)

A trickier issue is if oil prices were to shoot higher. Imagine they reach $100 a barrel, as some suspect is a possibility. Urals is already trading above the $60 price cap.

If that happens, the G-7 will be faced with the quandary of wanting to keep Russian oil flowing while at the same time seeking to constrain Moscow’s revenues.

In other words, it might logically see a need to raise the cap — thereby rewarding Moscow for its part in limiting the global supply of petroleum. Awkward. And any revision to the cap would need EU backing, which could be tough as some have sought lower thresholds.