G7 Will Determines the Fate of Russian Oil Price Cap

Key Insights

• G7 is reportedly ready to announce the Russian oil price cap on November 23.
• The oil market is busy with the coronavirus in China.
• Oil markets will likely be sensitive to the price cap announcement if the proposed price is outside of the previously discussed $60 – $65 range. 

G7 Countries Are Ready To Announce The Price Cap On Russian Oil

According to recent reports, G7 countries plan to announce the price cap on Russian oil on Wednesday, November 23.

The proposed price will be shared by the U.S. administration with the meeting of the EU ambassadors, which is scheduled to take place on November 23. If the EU agrees with the price, it will be revealed the same evening.

Previous reports suggested that the price may be set in the $60 – $65 range to keep Russia interested in complying with the oil price cap mechanism. Russia indicated that it would not supply oil to countries that participate in the price cap scheme.

G7 countries plan to cut Russia’s access to transportation and insurance services if it fails to comply with the oil price cap. In turn, Russia plans to use non-Western tankers and insurers to continue supplying oil to countries that have not imposed a price cap.

Recent data suggests that Russia failed to find enough tankers, so most analysts expect that Russia’s oil exports would decline after December 5, when the price cap mechanism is expected to start working.

Oil Markets Ignore The Price Cap Story As Traders Are Focused On The Situation With Coronavirus In China

Today, WTI oil made an attempt to settle below $77.50 while Brent oil tested the $86 level as traders focused on rising coronavirus cases in China.

The market is worried that demand will fall due to problems with coronavirus in China and recession in developed economies. At this point, market participants are not ready to focus on the Russian oil price cap story.

However, the situation may change quickly as the price cap mechanism will be implemented on December 5. The price cap itself will serve as an important catalyst for the oil market.

In case the price cap is within the previously discussed $60 – $65 range, traders may view it as a bearish sign, as such a price cap could provide an opportunity to keep all Russian oil in the market even if Russia formally rejects the price cap mechanism.

However, if the price cap is aggressive (for example, $40 – $50), the announcement may serve as a significant bullish catalyst for oil markets as it will be obvious that Russia would gladly take some of its oil out of the market to provide additional support to oil prices and try to hurt G7 countries.

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