EU price cap plan could force shadow fleet changes but enforcement questions remain

Reducing the price cap is an acknowledgement that oil prices have dropped considerably since it was first introduced and reflects the EU’s commitment to restrict Russia’s ability to generate revenue.

However, the price cap has been very difficult to enforce since its inception and, without any clear indication of what a tougher EU stance might look like, or whether the plan will get US support, the likely impact of the price cap plan remains unclear for the moment.

A combination of lower crude prices, plus a rapidly growing list of tankers now directly targeted by sanctions, has seen Russian oil move increasingly on mainstream tankers lifting under the price cap over the past few months.

Most grades of crude oil have been hovering well below the current $60 per barrel price cap since the beginning of April this year, and Baltic Urals has been consistently below $50 a barrel.

That has led to an increase in Russian exports — albeit at discounted rates — via a growing number of largely Greek operators that moved quickly to re-enter Russian trading under the price cap.

If the cap did move to $45, it would likely force most of those player back out of the market and imply a resurgence in shadow fleet tankers lifting crude sold closer to global benchmarks than the $15-$20 per barrel discount implied by the price cap.

“However, this would depend on sanctioned tankers’ access to insurance and importantly whether Russian lifters are willing to use sanctioned tankers” said Andrew Wilson, head of research at broker BRS.

“The data shows that some sanctioned tankers are still lifting from Russia. I would assume that sanctioned ships would eventually discharge into non-sanctioned shadow fleet tankers before these ships discharge in the crude’s final destination.”

The problem with such scenarios is that the EU price cap plan is just one factor in a rapidly moving set of variables.

There are also no guarantee that the plan will get signed off.

The oil price cap was first introduce in 2023 as a coordinated strategy from the G7 group of states. The EU will present the plans at the G7 summit in Canada this weekend, but it remains unclear whether the proposal will get US backing.

A solo EU lowering of the price cap is not inconceivable, particularly given that enforcement would largely target European shipowners and insurers. However, enforcement has long been a problem for EU states, which have struggled to match the volume of sanctions with direct action.

The commission also faces internal hurdles to get the plan approved, with at least two of the bloc’s most Kremlin-friendly countries threatening to use their right of veto.

Slovakia’s populist Prime Minister Robert Fico said on Wednesday that he would not support efforts to target the revenues Russia is using to fund its war in Ukraine, “unless the European Commission provides it with a realistic solution to the crisis situation Slovakia will find itself in after the full stoppage of gas, oil and nuclear fuel supplies from Russia”.

Hungary’s hard-right leader Viktor Orbán is also a likely blocker.

While such opposition has been successfully navigated with previous sanctions packages, the plan to lower the cap has already left EU insurers and some commission insiders questioning what the enforcement plans look like.

In addition to the likely circumvention tactics using the shadow fleet, it is possible that mainstream EU operators could continue to lift Russian oil under the lowered price cap if Russia further discounted prices. Given the ruble’s weakness, it is not inconceivable that even at $45, Russian exporters could still turn a profit.

Ultimately, the willingness of Russian exporters and buyers of Russian crude to accept the use of sanctioned tonnage will likely determine how much demand there is for mainstream tankers to export Russian crude, more than a potential EU price cap adjustment.

In addition to the price cap proposal unveiled on Tuesday, the commission also noted that it was adding a further 77 tankers to its sanction lists, taking the total to 419 ships.

Given the increasingly limited supply of shadow fleet tonnage to operate in conjunction with directly sanctioned tankers that are heavily restricted, mainstream tonnage may still be required to fill the gap somewhere.

Russia, meanwhile, remains predictably sanguine regarding the EU’s proposals.

When asked about the impact of the price cap being lowered, Kremlin spokesman Dmitry Peskov said on Wednesday that “such actions do not contribute to the stabilisation of international energy markets and the oil market”.

But then, according to the Reuters account of his response, he also noted: “Russia has been living under various restrictions for many days, which we still consider illegal and Russia has already gained some very useful experience in order to minimise any negative consequences from such decisions.”

* Lloyd’s List defines a tanker as part of the dark fleet if it is aged 15 years or over, anonymously owned and/or has a corporate structure designed to obfuscate beneficial ownership discovery, solely deployed in sanctioned oil trades, and engaged in one or more of the deceptive shipping practices outlined in US State Department guidance issued in May 2020. The figures exclude tankers tracked to government-controlled shipping entities such as Russia’s Sovcomflot, or Iran’s National Iranian Tanker Co, and those already sanctioned.