Unlike the discount, which is driven by the market and is offered to compensate buyers for the lack of insurance coverage for tankers carrying Russian crude, the proposed price cap is effectively a measure of state control. Capping prices is akin to creating a buyers’ cartel. But this move doesn’t make much sense as long as there is no vigorous competition between suppliers, while major oil-consuming nations such as China and India tend to support market pricing.
Along with a ‘cut-off price,’ there is no clarity about other details of the new mechanism. Market players are concerned that the longer they are kept in the dark (though the EU is planning to announce the final terms on 23 November), the higher the risk that buyers will turn down shipments that are already out to sea. All of this is complicated by major environmental risks for neighboring countries in case of oil spills.
The prevailing uncertainty is rattling the market even further. But as potential threats become clearer, so will the ways to adapt to new conditions. Yet there is another unknown ahead of the oil market as China imposes new lockdowns, which could affect economic fundamentals and demand, thus dragging down global benchmarks as well.