Europe and the United States started enforcing on Monday two of the toughest measures aimed at curbing Russia’s income from oil, the principal source of cash used to fund its nearly 10-month-old war in Ukraine.
The first, a price cap initiative led by the United States, aims to increase economic pressure on the Kremlin while avoiding a global oil shock. The limit was set at $60 per barrel, and was endorsed by the Group of 7 countries, Australia, and members of the European Union.
The second is an embargo under which European nations will no longer be able to buy most Russian crude as of Monday. It was a step that the European Union had agreed to months ago but that was phased in with exceptions to prepare member nations.
Prices gyrated in the oil markets on Monday, with Brent crude, the international benchmark, up by about 2.5 percent, to $87.75 a barrel, at midday in Europe. West Texas Intermediate future were selling at $82 a barrel.
An immediate impact on oil supplies in Europe was not expected, partly because the embargo has been in the works for months, and energy companies have already begun buying more oil from the United States, Brazil, Guyana and the Middle East.
The State of the War
- Russian Oil Price Cap: The E.U. agreed on a $60-a-barrel limit for Russian oil, the latest effort by Western allies to try to deprive Moscow of revenue to finance its war in Ukraine. Here’s how it will work.
- A Pivotal Point: Ukraine is on the offensive, but with about one-fifth of its territory still occupied by Russian forces, there is still a long way to go — and the onset of winter will bring new difficulties.
- Ukraine’s Power Grid: As many Ukrainians head into winter without power or water, crews are racing to restore Ukraine’s battered energy infrastructure, but Russian airstrikes threaten to undo such efforts.
Although analysts and traders say the price cap may prove a nightmare to administer, one expert on sanctions said the lengthy negotiations had produced a deal with the potential to work.
“I suspect the compromise that was reached gives the policy the best chance it could have to succeed,” said Edward Fishman, a senior research scholar at Columbia University’s Center on Global Energy Policy.
Mr. Fishman, who previously led planning and implementation of sanctions on Russia at the Department of State, said there were several reasons to be optimistic. One is the recent softness of oil markets, which he interpreted as meaning that Russian oil was no longer as critical to the markets as it was a few months ago. He also said the agreed $60 price was a “Goldilocks” level, not so high as to give Russia even more revenue than it is currently receiving or so low as to discourage Moscow from producing oil.
He also said that the cap’s provision to review the price level every two months, or more frequently if needed, provided the “flexibility” that historically has helped make sanctions, like those targeting Iran’s oil sales, effective.
Still, skepticism about the likely efficacy of the measures stems in part from the United States and European countries mandating European shippers and insurers to enforce it by declining to handle cargoes priced above the $60-a-barrel level.
For starters, analysts say, data about pricing Russian oil has become scarce in recent months. Few if any trades are reported, and prices quoted in the market “are mostly based on hearsay,” said Viktor Katona, an analyst at Kpler, a research firm that tracks shipping.
Russia has said it will not accept a price cap and has threatened to cut off supplies to countries that comply with the arrangement. If Russia followed through on such steps and restricted oil as it has natural gas flows to Europe, it could wreak havoc in the oil market markets.
“These measures will undoubtedly have an impact on the stability of the global energy market,” Dmitri S. Peskov, the Kremlin spokesman, said on Monday, according to Tass, the Russian state-run news agency, referring to the embargo and price cap.
Analysts say that Russia has been building a so-called shadow fleet of old tankers to export its oil and avoid the E.U. sanctions, but they doubt that it can assemble a large enough flotilla. If it can’t, Russia may need to begin closing down wells.
The G7 nations — the United States, Canada, Britain, Germany, France, Italy and Japan — have already mainly stopped buying Russian oil, so any problems with a decline in Russia’s exports risks damaging the economies of countries like China and India, big customers that have declined to condemn Russia’s invasion of Ukraine.
The looming embargo and the price cap were the chief reasons that OPEC and its allies, including Russia, decided on Sunday to leave their quotas for oil production unchanged. The group, known as OPEC Plus, appears to have decided that there was no reason to alter its policy amid the many economic uncertainties, including a stumbling economy in China and crippling inflation globally that are fueling fears of a recession.
Many analysts believe Saudi Arabia, the de facto leader of the producers’ group, is seeking a price of about $90 a barrel for Brent crude. The Saudis, according to market watchers, would probably cut production, regardless of protests from Ukraine and its allies, if prices fall significantly from that level.