For months, oil traders have worried that a European Union embargo and a price cap on Russian oil, two measures that took effect Monday, would lead to a price spike and dangerous crude oil shortages.
By Friday, prices fell instead of the feared oil shock spikes. They are now as low as they have been all year since the Russian invasion of Ukraine.
Not everything has gone smoothly. Turkey has blocked tankers, most of which carry oil for companies operating in Kazakhstan, such as Chevron and Exxon Mobil’s joint venture, from navigating the narrow Bosphorus. Turkish officials are looking for insurance papers.
But traders have largely shrugged off that news. Oil prices fell about 10 percent this week.
So what happened?
Oil markets woke up to the realization that the new sanctions against Russia, feared by traders, may not, at least initially, be as big a blow to Russian crude stockpiles as once feared.
“The perception was that this would really crush Russian stocks, and that’s no longer the perception,” said Neil Crosby, a senior analyst at OilX, a research firm.
Brent oil, the international benchmark, fell through the $80 a barrel level for the first time since January, as prices rose 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 rate hikes by central banks aimed at curbing inflation could hamper economic growth around the world and reduce demand for oil. Such concerns are coupled with the assumption that China, the world’s largest energy importer, will only gradually revive its economy despite an easing of Covid restrictions.
“There is also a growing awareness that China’s reopening will be a slow, protracted affair and that Europe and the United States are facing a difficult winter economically,” said David Fyfe, chief economist at Argus Media, a raw materials research firm.
The purpose of the price cap on Russian oil was until recently misunderstood, analysts say. Rather than attempting to take Russia off the market, the measure was pushed by the Biden administration to encourage Russia to continue producing oil, but at a relatively low price. The White House tried 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 works. So far, Russian oil exports continue to flow, but at a price that may have seemed unthinkable in the early months of the war in Ukraine, when Brent hit $110 a barrel.
According to Argus, Ural, Russia’s main crude, is loaded onto ships in Baltic and Black Sea ports for about $42 a barrel. Before the war in Ukraine, Ural was generally sold at a price closely related to Brent. Buyers can now get massive discounts of around $35 per barrel.
At such prices, there is little problem for shippers to meet the price cap, which was set at $60 a barrel. But Western shippers and insurance companies, which have been made key enforcers of the cap, are still wary of dealing with Russia, analysts say, fearful they could face hefty fines if they violate sanctions.
Moscow is so far ready to sell at low prices. Russia 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 even consider cutting production, a move that could raise prices but also raise the question of whether Moscow can sell and transport all of its oil.
But so far the price cap has had “no impact whatsoever” on Russian exports, which started December strong, said Viktor Katona, an analyst at Kpler, a shipping tracking firm.
Most ships and their cheaply priced oil go to India, Mr Katona said. Europe, once a major customer of Russian oil, is now attracting more tankers from Latin America, the United States and other locations.
Instead, the embargo and price cap hit unintended targets.
The Turkish government blames the sanctions and prevents oil tankers from Kazakhstan, which are not subject to sanctions, from passing through the strait from the Black Sea to the Mediterranean. Russia does not appear to be involved, although it is close to controlling Kazakhstan’s oil exports, which are piped in to the Russian port of Novorossiysk. In recent months, Russian authorities have put obstacles in place for Kazakh oil exports, much of which is produced by subsidiaries of Western energy companies.
The Turkish government says it is concerned that the new sanctions could invalidate the tankers’ insurance policies and make Ankara foot the bill for any oil spills, so it is demanding specific coverage guarantees during the time a ship is in Turkish waters. In a statement on Thursday, Turkey’s maritime authority said it would not “risk an insurance company” failing to fulfill its responsibilities if a sanctioned ship suffered a disastrous accident in the Turkish strait.
Western marine insurance companies, known as P&I clubs, have so far refused to comply with this request, saying it is unusual and could increase their deductibles to violate Western sanctions.
Mr Katona said backup of oil-laden tankers in the Bosphorus had reached 22, 17 of which were carrying oil from Kazakhstan. These ships likely carry most of their crude oil to European destinations, he said.
So far, the slowdowns from Kazakhstan have not raised overall oil prices, although they have lowered the price of Kazakh crude, analysts say. Western governments, including the United States, have tried to ease the Turkish government, so far without success. If the delays continue, they may start raising prices.
There are other reasons why the relatively smooth sailing of the first week of tightened sanctions against Russia may not continue.
Analysts say more problems could emerge in early February, when the EU embargo extends to Russian refined products. The main concern is diesel, a crucial fuel for vehicles and industry that Europe has been importing in large quantities from Russia for years.
“In the run-up to February, anxiety is mounting,” said Dev Sanyal, CEO of VARO, a major European refining and trading company.
Analysts also say it is still possible that the sanctions will result in a significant drop in Russian oil production, even if the amount is less than once feared. Over time, prices may rise, making the $60 per barrel price cap more of a problem. Moscow may also become uneasy about receiving such low prices, considering measures that could push them higher, including curbing its own oil production or discouraging flows from other producers.
“That would change the perception of the market,” said Mr. Crosby.
Safak Timur contributed reporting from Istanbul.