Oil prices spiked by 5% Friday after the U.S. announced new sanctions against two entities for violating the terms of the Russian oil price cap, in a preview of new enforcement measures expected to be detailed next week.
The sanctions are the first time that the G7-led group has taken steps to punish entities for defying the Russian oil price cap — a first-of-its-kind effort designed to slash Russia’s oil revenue while also keeping its barrels on the market.
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Futures for international benchmark Brent crude climbed above the $90 mark by midday Friday, a 5.4% jump from the previous day of trading, while futures for U.S.-based West Texas Intermediate climbed to $87.48, or a 5.51% increase.
WTI, for its part, also posted weekly gains of 4%, its largest single-week jump since Sept. 1.
At a time when the Middle East is experiencing its own geopolitical conflict that threatens to choke off oil and gas exports, some fear that cracking down on the cap could force Russia to deepen its seaborne crude export cuts or shut off production altogether.
The two companies sanctioned by the Treasury are Lumber Marine, a UAE-based company that has continued to ferry Russian oil at prices at or above $75 per barrel, and the Turkish shipping company Ice Pearl Navigation, which is exporting Russian oil at prices above $80 per barrel. Both ships, which conducted port calls in the Russian Federation, used U.S.-based service providers while transporting the Russian oil.
“Taking the steps is sending a clear message to Russia that we will continue to be focused on forcing them into two costly options. And attempts to expand beyond them will face a decisive and unified response,” a senior Treasury Department official said Thursday.
"And attempts to expand beyond them will face a decisive and unified response,” the official added.
Still, many viewed it as a sign that the coalition is not afraid to take action to enforce its price cap — a risky plan that could push Russia to further reduce its oil production or halt exports completely.
Russia has repeatedly threatened to cut production in the months since G7 leaders announced plans for the two-part price cap. In January, Russia reduced its output by 500,000 barrels per day, or roughly 5% of its total exports for the month, in retaliation for Western sanctions.
Russia also has limited domestic storage space, meaning it cannot continue to produce at much of a surplus as it looks to find new buyers. Since oil production is an industry that cannot simply be turned on and off like a spigot, Russia would likely be forced to halt production, injecting fresh volatility into markets and sparking new fears of a supply shortage.
A senior Treasury spokesperson told the Washington Examiner this week that the U.S. will push for additional enforcement actions.
“Coalition compliance and enforcement authorities take allegations of intentional price cap violations extremely seriously and will exercise appropriate authorities to take action where appropriate,” the spokesperson said.
And as Treasury Secretary Janet Yellen prepares to travel to Luxembourg for the Eurogroup’s finance ministers meeting this week, analysts say the price cap and efforts to enforce it are expected to be among the most important topics of discussion.
“[A] geopolitical risk premium still lingers around the corner that is likely to support oil prices in the short-term," Kelvin Wong, a senior analyst at OANDA, told Reuters on Friday.
Markets are most concerned by potential supply disruptions due to Middle East tensions from the Israel-Hamas war and the possibility of broader conflict, as well as retaliatory measures from Russia, which has repeatedly threatened to throttle or halt its oil exports.
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These fears are not unjustified, however.
Russian seaborne oil product exports dropped last month by 2.5% compared to August, according to new industry data, underpinned by temporary bans on gasoline and diesel exports and its 500,000 bpd oil production cut that is slated to last through the end of the year.