Recently, the West imposed new sanctions on Russian oil products in an effort to curb the nation’s activities and influence. However, the sanctions failed to cause the anticipated increase in diesel prices, with fuel prices barely moving. Analysts have noted that the market appears to be in a “show-me” mode, waiting to see the real impact of these sanctions.
The Effect of Sanctions on Russian Crude
In December, similar sanctions were placed on Russian crude, but the prices didn’t move much either. In fact, Russia exported more oil than before the sanctions were imposed. S&P Global reports that Russian seaborne crude hit a six-month high in the first half of January. These new sanctions on fuel products, like the sanctions on crude, ban Russia from exporting to Europe and other G-7 nations, and place a price cap on exports to other nations. Premium products, such as diesel, are capped at $100 per barrel, below the market value.
Avoiding Price Shocks
The sanctions were designed to avoid price shocks and maintain stability in the market. The White House calculated that if they set the prices high enough for crude, Russia would comply. Russia wouldn’t cut off its customers that paid at or below the cap. As a result, instead of going to Europe, the crude has been flowing to India, China, and non-G-7 countries that haven’t agreed to the ban. If the supply stays the same, the price impact is expected to be minimal.
The Difference Between Crude and Fuel Sanctions
RBC Capital Markets analyst Helima Croft notes that there is a difference between crude and fuel sanctions. China and India are happy to import Russian crude at a discount, but they have less of a need for fuels since they have their own refineries. As a result, the fuel products may go elsewhere. In the end, not all Russian fuel may find a home, reducing global supplies and potentially raising prices.
In conclusion, the sanctions placed on Russian oil and fuel products have yet to cause the expected increase in prices. The market appears to be waiting to see the real impact of these sanctions. While the sanctions on crude have led to increased exports to India, China, and non-G-7 countries, there is a difference between crude and fuel sanctions. The latter may struggle to find a home, potentially reducing global supplies and raising prices in the future.