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Oil Merchants Troubled by Trade Norms That Don’t Fit the Cap

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https://www.bloomberg.com/news/articles/2022-12-06/oil-merchants-troubled-by-trading-norms-that-don-t-fit-price-cap
 
Oil Merchants Troubled by Trade Norms That Don’t Fit the Cap
 
By Serene Cheong and Sharon Cho
 
December 6, 2022 at 1:27 AM EST
Updated on December 6, 2022 at 6:02 AM EST
 
The oil price cap that the Group of Seven nations imposed on Russia may finally be in place, but it’s yet to convince one vital group of people: the traders who can help get the supplies onto the global market.
 
From Dec. 5, any company wanting to access G-7 services -- particularly European insurance and ships -- to move Russian oil can only do so if they pay $60 a barrel or less for the cargo. The initiative is aimed at punishing the Kremlin for the Ukraine war by curbing oil revenue while maintaining exports. 
 
The US pushed for the measure as a way of softening European Union sanctions that threatened a far bigger supply disruption and surge in prices. Now the market is trying to figure out what effect the cap will have.
 
But the measure is troubling traders because it doesn’t fit with how physical crude shipments are purchased and valued in the real world. This is creating challenges around risk management, which have only been exacerbated by wild swings on a daily, weekly and monthly basis since the invasion. 
 

Buyers today will often have to wait several weeks to learn the final per-barrel price they have to pay. In that period, it could have risen to an above-cap level, causing all sorts of complications.
 
The oil traders Bloomberg spoke to highlighted a potential risk for traders or middlemen to be stuck with an above-cap cargo giving them limited access to European ships and insurance. This poses difficulties on the physical handling of cargoes, in addition to the hedging of exposures. 
 
“Physical traders rarely trade on a fixed price,” said John Driscoll, chief strategist at JTD Energy Services Pte Ltd, who has spent over 30 years trading crude and petroleum in Singapore. “It’s a much more complex space where they trade on formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows.” 
 
Typically, purchases of Urals, ESPO and Sokol -- three top Russian grades -- are priced on a forward and floating basis. That means their final prices aren’t known until several weeks after the cargo has been bought. 
 
As an example, in recent ESPO purchases done last week, Chinese refiners, which have been among the biggest buyers of Russian crude along with India, agreed to pay a discount to the average of front-month February ICE Brent contract. But this will be tabulated only at the end of December. 
 
The cap hasn’t all been bad news for Russia or its ability to find buyers.
 
Asian refiners such as Taiwan’s Formosa Petrochemical Corp. welcomed the news as an opportunity for buyers to resume Russian purchases after staying on the sidelines since the war. India, which has soaked up record Russian volumes in past months, said it will buy from wherever and isn’t expecting the cap to have any impact on imports.
 
Russia has said it will not cooperate with entities or countries that support the price cap on its oil. The foreign minister said it intends to negotiate with partners directly. 
 
While Russian oil can still flow using non-EU services -- such as for cargoes not bought under the cap -- it’s unclear if there are enough ships and insurers to handle all the shipments diverted from Europe.
 
— With assistance by Yongchang Chin and Julian Lee
 
(Updates with chart on Russian crude exports by destination.)