Russia's Reaction To US-Led Price Cap Threatens To Tighten Global Crude Oil Market Supply

Russia's response to a US-led price cap plan threatens to tighten the global crude oil market supply. This could lead to crude oil prices hitting $125 a barrel.

Russia’s invasion of Ukraine has sent energy prices to historic highs, as the conflict has resulted in high market volatility and a coordinated set of sanctions targeting Russia’s economy. Russia has threatened to cut its oil supply if the G7 nations plan to move forward with the price cap plan, reports said.

Dominic Schnider, head of commodities at UBS Global Wealth Management, told media that "The Russians were clear: 'If you force us to accept the price cap, we're simply not going to deliver crude to you."

"And so I think that kind of situation means, maybe, from a global supply perspective, there's an additional 1 million barrels at risk here. As we get further draws, you're going to see prices going up. That simple. And we're looking at $110-$125, that's for us our point of gravity when it comes to crude oil," he added.

The agreement of the G7 nations to put a price cap on Russian oil is an attempt to reduce Russia's revenues. This would help in reducing the country's ability to fund its ongoing conflict with Ukraine. Unfortunately, they also face the tedious task of convincing China and India to join the price cap plan as they are the biggest buyers of Russian crude oil.

"It complicates. I mean, Europe still wants to get rid of some — depending on how you calculate — oil and products. That means it's between two-and-a-half and up to three million barrels. You need to find these barrels. That's number one," Schnider said.

He also added that "We are still quite concerned if that kind of rotation in trade flows — how is that going to really work out? Because the Russians were clear."

However, Schnider also pointed out that the US still had options to help ease the tightness in the crude oil market supply. This included tapping into its Strategic Petroleum Reserve for additional oil releases.