EU’s Oil Price Cap Creates a Price Cap… on Stupidity, by Tom Luongo

Another in a long line of stupid ideas from the EU. The official SLL over/under on the duration of the EU from 1/1/23 is two years. From Tom Luongo at tomluongo.me:

MOSCOW, RUSSIA – DECEMBER 1, 2021: Russia’s Foreign Ministry Spokesperson Maria Zakharova gives a weekly press briefing. Russian Foreign Ministry/TASS

The EU and the US went forward with their long-debated, long-telegraphed move to put a price cap on Russian oil at $60 per barrel.

By believing they can pressure suppliers into not hauling Russian oil lest they run afoul of the sanctions that support the price cap, they believe they can take only Russian oil off the market for the long run.

Because of the way oil is actually traded in the real world, versus the way it trades in Janet Yellen’s head, this policy is actually much harder to implement than it actually looks. You don’t buy oil at the crude oil counter at Target or Wal-Mart.

There isn’t a price tag you can look at and say yes or no too. As Tsvetana Paraskova at Oilprice points out, crude contracts are written based on a discount or premium to a benchmark price at a particular moment in time.

“Physical traders rarely trade on a fixed price,” John Driscoll, chief strategist at JTD Energy Services Pte Ltd, told Bloomberg. 

“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,” said Driscoll, who has more than 30 years of trading oil in Singapore.

To complicate things further, the EU wants to remain flexible to change the cap at its discretion.

“The price cap is not set in stone – it “is fixed for now but adjustable over time,” the EU said last week.  

If this sounds like a recipe for complete disaster, it is.

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