OIL: GS Oil Price Caps Have no Teeth

DB's OPEC PREVIEW

GS: Loopholes keep cap enforcement weak.

Reports today suggest that the G7 is considering a price cap on Russian oil of c.$65-70/bbl, substantially higher than the $40-60/bbl range discussed earlier this year, which was meant to merely cover the cost of production. However, this was an incomplete analysis, as it did not consider Russia’s influence on global prices.

If a price cap is set too low, Russia would be incentivized to evade the cap and market its crude at (discounted) global prices, maintaining most of its exports via an extensive ‘shadow fleet’, independent of G7 financial and transportation services. Higher global prices would result.

Our Comment: If the price cap had teeth, it would jeopardize the European oil tanker insurance industry as well. It would deliver a whole industry into India and other BRIC country’s hands. We don’t think Europe can afford to let that happen right now.

DB: Opec Preview

We believe that OPEC is more likely than not to keep quotas unchanged at its December meeting. The market should now be reassured that a policy pivot cannot take place without building a new fundamental rationale and framework (which is absent).