Setting price cap for Russian oil vital for Europe amidst upcoming sanctions

Upcoming sanctions on Russian oil are set to be “really disruptive” for energy markets if European nations fail to set a cap on prices, analysts warned.

The 27 countries of the European Union agreed in June to ban the purchase of Russian crude oil from December 5. In practical terms, the EU — together with the United States, Japan, Canada and the UK — want to drastically cut Russia’s oil revenues in a bid to drain the Kremlin’s war chest following its invasion of Ukraine.

However, concerns that a complete ban would send crude prices soaring led the G-7 to consider setting a cap on the amount it will pay for Russian oil.

An outright ban on Russian imports could be “really disruptive” to markets, according to Henning Gloystein, director of energy, climate and resources at political risk consultancy Eurasia Group.

The potential for rising oil prices is “why there’s pressure from the US” to agree on a cap, Gloystein told CNBC on November 30.

A price limit would see G-7 nations buy Russian oil at a lower price, in an effort to reduce Russia’s oil income without raising crude prices across the globe.

However, EU nations have been in dispute for several days over the right level to cap prices.

A proposal discussed earlier this week suggested a limit of $62 a barrel, but Poland, Estonia and Lithuania refused to agree to it, arguing it was too high to dent Russia’s revenues. These nations have been among the most vocal in pushing for action against the Kremlin for its aggressions in Ukraine.

Speaking to CNBC’s Julianna Tatelbaum on November 30, the Dutch energy minister said a cap on Russian oil prices was “a very important next step.”

“If you want effective sanctions that are really hurting the Russian regime, then we need this oil cap mechanism. So hopefully we can agree on it as soon as possible,” Rob Jetten said.

On November 30, Russian oil traded at about $66 a barrel. Officials at the Kremlin have repeatedly said a price cap is anti-competitive and they will not sell their oil to countries that have implemented the cap.

They’re hoping that other major buyers — such as India and China — won’t agree to the limit and so will continue to purchase Russian oil.