The results of the Crude Oil Price Cap, which came into force on Dec. 5th, are mixed to date. Contrary to the hopes of Price Cap proponents, Russia's oil exports in barrel terms have fallen. Nor is the Price Cap binding for Russia's Pacific exports. On the other hand, Russia's oil export prices toward Europe remain below the Cap limit of $60 / barrel, Russian oil revenues are down, and global oil prices remain comparatively subdued. For the moment, the Cap can be considered a qualified success.

The Price Cap and EU embargo will be extended to refined products on Feb. 5th. Refined products comprise principally gasoline and diesel, but also include jet fuel (kerosene) and a variety of minor products. In 2021, refined products constituted nearly 40% of Russian oil exports. They are substantial.

Europe is Russia's largest traditional customer for refined products by far, taking about half of Russia's refined product exports in 2021.

The practice continues. European customers have been loading up on Russian imports, most notably diesel, with levels exceeding those of 2021. Nevertheless, on Feb. 5th, EU imports of Russian products will effectively cease, representing a decline of perhaps 1.3 mbpd.

Sales of refined products to countries willing to purchase from Russia may still be subject to the Price Cap if western shipping or service companies are involved. According to guidance for products issued by the US Treasury last week, the maximum allowable payment to Russia is $60 / barrel, as it is for crude oil.

Given that European diesel futures are currently trading in excess of $125 / barrel equivalent, a $60 / barrel cap is quite a haircut. Even allowing for lower value products like gasoline, the average value of refined products in Europe exceeds $110 / barrel. In aggregate dollar terms, the difference between the market value of refined product imports to Europe and the Price Cap limit is about $25 bn / year. That's quite a lot of money.

Who gets to pocket the difference?

For starters, cheaper gasoline and diesel could benefit consumers. Take India, for example. Gasoline prices there are set administratively by the government. During the pandemic, Indian pump prices tended to track Brent, just as did the Russian Urals price. Since the start of the war, however, Delhi gasoline prices (our proxy for Indian gasoline prices) have tracked Urals rather than Brent. This suggests that the Indian government has indeed passed on savings from cheap Russian oil to consumers.

Source: OilPrice.com; PetrolDieselPrice.com

Of course, the matter is not so clear-cut, as not all Indian refiners have had equal access to cheap Russian crude, and not all the resulting refined products have been sold domestically. Some -- primarily state-owned refiners -- saw big losses in mid-2022 even as private refiners were re-exporting refined Russian crude as gasoline and diesel and reaping windfall profits.

It is probably safe to say that large arbitrage profits, like those between market oil prices and the Oil Price Cap, are likely to be captured by private interests. For example, intermediaries like shippers may profit. The Baltic Dirty Tanker Index, an average of tanker day rates on key crude oil trade routes, shows that crude tanker rates soared with the start of the war and peaked at nearly three times the long-term average heading into the Price Cap in early December. On specifically Russian routes, the day rates may be sufficiently high to purchase the respective tanker with the profits from as few as two round trips.

Any remaining windfall will accrue to purchasing entities, notably refiners, and associated government stakeholders. Those most likely to benefit include Turkey; the Middle East, including Saudi Arabia; certain countries in Africa, for example, Nigeria; and, of course, India. These countries may find it highly profitable to import heavily discounted Russian products for domestic consumption and export their own gasoline and diesel back to Europe.

Of course, Russia could decide to cut production rather than selling at heavy discounts. Nevertheless, this would appear unlikely. Moscow has stated that it will not sell crude or refined products to countries which refuse to purchase those same products from Russia. Substantively, this is a tantrum, not meaningful retaliation. More importantly, the Kremlin has not refused to deal with service providers complying with the Price Cap. Therefore, we can assume that Russia has elected to comply with the Price Cap for sales using western services to countries not in the Price Cap coalition, for example, to India. On paper, Turkey should be the principal beneficiary, as Russian exports must travel only across the Black Sea to reach Turkish ports, and Turkey's product exports would not have to travel far to reach Europe.

To date, the Crude Oil Price Cap can be considered a success, but that success is principally due to demand weakness for oil products in China, Europe and the US. At a guess, the Refined Products Price Cap is likely to produce similar results, possibly with a modest reduction in Russian exports accompanied by a re-working of refined product trade patterns with limited impact on gasoline and diesel prices.

But the risks remain. The chief among these is a recovery of the global economy, particularly China. In such an event, oil prices could soar, and the Price Cap and its sponsors will find themselves taking the blame.