For months, oil traders have worried that a European Union embargo and a price cap on Russian oil, two measures that took effect on Monday, would lead to a price spike and dangerous shortages of crude.
By Friday, instead of the feared oil shock spikes, prices slid. They are now as low as they’ve been all year, since before Russia’s invasion of Ukraine.
Not everything has gone smoothly. Turkey has blocked tankers, most of them carrying oil for companies operating in Kazakhstan like the joint venture of Chevron and Exxon Mobil, from transiting the narrow Bosporus. Turkish officials are seeking insurance documentation.
But traders have largely shrugged off that news. Oil prices are down by about 10 percent for the week.
So what happened?
The oil markets woke up to the realization that the new sanctions on Russia, which traders had dreaded, may at least initially not be as big a hit to supplies of Russian crude as once feared.
“The perception was that this would really crush Russian supplies, and that is no longer the perception,” said Neil Crosby, a senior analyst at OilX, a research firm.
Brent crude, the international benchmark, fell through the $80-a-barrel level for the first time since January, when prices soared during the tense run-up to Russia’s invasion of Ukraine in February. On Friday, it was selling for just under $77 a barrel.
In addition, traders calculate that further central bank interest rate increases, aimed at curbing inflation, may hobble economic growth around the globe and reduce demand for oil. Such concerns are coupled with an assumption that China, the world’s largest energy importer, will rev up its economy only gradually, despite an easing of Covid restrictions.
“There’s also increasing awareness that China’s reopening will be a slow, drawn-out affair and that Europe and the United States are in for a difficult winter economically,” said David Fyfe, chief economist at Argus Media, a commodities research firm.
What the price cap on Russian oil was intended to do had been misunderstood until recently, analysts say. Rather than an attempt to remove Russia from the market, the measure was pushed by the Biden administration to encourage Russia to keep producing oil but at a relatively low price. The White House was trying to prevent the European embargo from driving up the price of gasoline and other petroleum products for consumers in the United States and elsewhere.
In that sense the price cap is working. So far, Russian oil exports continue to flow but at a price that might have seemed inconceivable in the early months of the war in Ukraine, when Brent reached $110 a barrel.
According to Argus, Urals, Russia’s main grade of crude, is being loaded on ships at ports on the Baltic and Black Seas at around $42 a barrel. Before the war in Ukraine, Urals generally sold at a price closely linked to Brent. Buyers can now extract huge discounts of around $35 a barrel.
At such prices, there is little problem for shippers to comply with the price cap, which was set at $60 a barrel. But Western shippers and insurance companies, which have been made the key enforcers of the ceiling, are still wary of dealing with Russia, analysts say, worrying that they could be hit with big fines if they violate the sanctions.
Moscow is so far willing to sell at bottom-of-the-barrel prices, and still seems to be trying to come up with a response to the sanctions. On Friday, President Vladimir V. Putin told reporters that Moscow would consider reducing production, a move that might increase prices but also would raise questions about whether Moscow can sell and transport all of its oil.
As of now, though, the price cap has had “no impact whatsoever” on Russian exports, which have started December strong, said Viktor Katona, an analyst at Kpler, a firm that tracks shipping.
Most of the ships and their bargain-priced oil are going to India, Mr. Katona said. Europe, once a big customer of Russian oil, is now attracting more tankers from Latin America, the United States and other locations.
Instead, the embargo and price cap are hitting unintended targets.
Blaming the sanctions, the Turkish government is stopping tankers carrying oil from Kazakhstan, which is not under sanctions, from going through the straits from the Black Sea to the Mediterranean. Russia does not seem to be involved, although it has a near chokehold on Kazakhstan’s oil exports, which are delivered by pipeline to the Russian port of Novorossiysk. In recent months, Russian authorities have created obstacles for Kazakh oil exports, much of which is produced by subsidiaries of Western energy companies.
The Turkish government says it is worried that the new sanctions could invalidate the tankers’ insurance policies and leave Ankara to foot the bill for any oil spills, so it is demanding specific guarantees of coverage while a ship is in Turkish waters. In a statement on Thursday, the Turkish maritime authority said it would not “take the risk of an insurance company” not meeting its responsibilities if a vessel under sanctions had a disastrous accident in the Turkish straits.
Western marine insurance providers, known as P&I clubs, have so far declined to comply with this request, saying it is unusual and could increase their own risk of being in breach of the Western sanctions.
Mr. Katona said the backup of oil-laden tankers at the Bosporus had reached 22, with 17 of them carrying oil from Kazakhstan. These ships are probably taking most of their crude to European destinations, he said.
So far the delays from Kazakhstan have not raised overall oil prices, though they have reduced the price of Kazakh crude, analysts say. Western governments, including the United States, have tried to persuade the Turkish government to relax, without success so far. If the delays continue, they could begin lifting prices.
There are other reasons the relatively smooth sailing of the first week of the enhanced sanctions on Russia may not continue.
Analysts say more difficulties could arise in early February, when the E.U. embargo extends to include Russian refined products. The biggest concern is diesel, a critical fuel for powering vehicles and industry that Europe has for years imported in large quantities from Russia.
“In the buildup to February, there is rising anxiety,” said Dev Sanyal, chief executive of Varo, a large European refining and trading company.
Analysts also say it is still possible that the sanctions will result in a sizable drop in Russian oil production even if the amount is less than was once feared. Over time, prices could rise, making the $60 cap more of an issue. Moscow may also become restive about receiving such low prices, and consider actions that might push them higher, including cutting back its own oil output or deterring flows from other producers.
“That would change the perception of the market,” Mr. Crosby said.
Safak Timur contributed reporting from Istanbul.