For months, oil traders have feared that a European Union embargo and a price cap on Russian oil, two measures that took effect on Monday, could lead to soaring prices and dangerous crude shortages.
On Friday, instead of the feared oil shock spikes, prices slipped. They are now as low as they have been all year since before Russia invaded Ukraine.
All did not go smoothly. Turkey has blocked tankers, most carrying oil for companies operating in Kazakhstan like Chevron’s joint venture and Exxon Mobil, from transiting through the narrow Bosphorus. Turkish authorities are looking for insurance documents.
But traders largely ignored this news. Oil prices are down about 10 percent for the week.
So what happened?
Oil markets woke up to the realization that new sanctions on Russia, which traders had feared, may at least initially not be as burdensome on Russian crude supplies as once feared.
“The perception was that it would really crush Russian supplies, and that’s not the perception anymore,” said Neil Crosby, principal analyst at OilX, a research firm.
Brent crude, the international benchmark, broke above $80 a barrel for the first time since January, when prices soared during the tense run-up to Russia’s invasion of Ukraine in February. On Friday, it was selling for just under $77 a barrel.
In addition, traders calculate that further interest rate hikes by the central bank, aimed at curbing inflation, could hamper economic growth around the world and reduce demand for oil. These worries come with an assumption that China, the world’s largest energy importer, will only gradually revive its economy, despite an easing of Covid restrictions.
“There is also a growing awareness that reopening China will be a slow and drawn-out affair and that Europe and the United States are going to have a tough winter economically,” said David Fyfe, economist in chief at Argus Media, a commodities research company.
What the Russian oil price cap was supposed to do had been misunderstood until recently, analysts said. Rather than an attempt to take Russia out of the market, the measure was pushed by the Biden administration to encourage Russia to continue producing oil but at a relatively low price. The White House was trying to prevent the European embargo from driving up the price of gasoline and other petroleum products for consumers in the United States and elsewhere.
In this sense, the price cap works. So far, Russian oil exports continue to pour in but at a price that might have seemed inconceivable in the early months of the war in Ukraine, when Brent was hitting $110 a barrel.
According to Argus, Urals, the main grade of Russian crude, is loaded onto ships in Baltic and Black Sea ports at around $42 a barrel. Before the war in Ukraine, Urals generally sold at a price closely related to that of Brent. Buyers can now get huge discounts of around $35 a barrel.
At such prices, there is little problem for shippers to meet the price cap, which has been set at $60 per barrel. But Western shippers and insurance companies, which have become the main enforcers of the cap, are still reluctant to deal with Russia, analysts say, fearing hefty fines if they breach the sanctions .
Moscow is so far willing to sell at the lowest price and still seems to be trying to find an answer to the sanctions. On Friday, President Vladimir V. Putin told reporters that Moscow would consider cutting production, a move that could raise prices but also raise questions about whether Moscow can sell and transport all of its oil.
So far, however, the price cap has had “no impact” on Russian exports, which started December strong, said Viktor Katona, an analyst at Kpler, a company that tracks shipments.
Most of the ships and their cheap oil go to India, Katona said. Europe, once a big customer of Russian oil, is now attracting more tankers from Latin America, the United States and other countries.
Instead, the embargo and price cap hit unintended targets.
Blaming the sanctions, the Turkish government is preventing tankers carrying oil from Kazakhstan, which is not under sanctions, from crossing the strait from the Black Sea to the Mediterranean. Russia does not appear to be involved, although it nearly chokes off Kazakhstan’s oil exports, which are delivered by pipeline to the Russian port of Novorossiysk. In recent months, Russian authorities have created barriers to exports of Kazakh oil, much of which is produced by subsidiaries of Western energy companies.
The Turkish government fears that the new sanctions will invalidate tanker insurance policies and leave Ankara to foot the bill for any oil spills. It therefore requires specific guarantees of coverage when a vessel is in Turkish waters. In a statement on Thursday, Turkey’s maritime authority said it would “not take the risk of an insurance company” failing to take responsibility if a vessel under sanctions had a disastrous accident in the Turkish strait.
Western marine insurers, known as P&I clubs, have so far refused to comply with the request, saying it is unusual and could increase their own risk of breaching Western sanctions.
Katona said the reserve of tankers loaded with oil in the Bosphorus had reached 22, including 17 carrying oil from Kazakhstan. These vessels likely transport most of their crude to European destinations, he said.
So far, Kazakhstan’s delays have not pushed up overall oil prices, although they have lowered the price of Kazakh crude, analysts said. Western governments, including the United States, have tried to persuade the Turkish government to relax, with no success so far. If the delays continue, they could start raising prices.
There are other reasons why the relatively smooth sailing of the first week of heightened sanctions against Russia may not continue.
Analysts believe more trouble could arise in early February, when the EU embargo extends to Russian refined products. The biggest concern is diesel, an essential fuel to power vehicles and industry that Europe has imported in large quantities from Russia for years.
“In the build-up to February, anxiety is mounting,” said Dev Sanyal, chief executive of Varo, a major European refining and trading company.
Analysts also say there is still a possibility that the sanctions could lead to a significant drop in Russian oil production, even if the amount is lower than once feared. Over time, prices could rise, making the $60 cap more problematic. Moscow could also become reluctant to receive such low prices and consider actions that could push them up, including cutting its own oil production or deterring flows from other producers.
“It would change the perception of the market,” Crosby said.
Safak Timur contributed reporting from Istanbul.