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Sanctions against Russian crude have “completely failed,” says an oil analyst

The G-7, the EU and Australia introduced a cap on Russian oil prices on December 5th.

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Sanctions on Russian crude have so far “completely failed” and new price caps may also prove immaterial, analysts told CNBC.

The European Union plans to ban imports of refined petroleum products from Russia, including diesel and kerosene, from Sunday.

The 27-strong bloc has banned the purchase and import of Russian crude oil from the sea since December.

In addition, the bloc — along with its Group of 7 and Australia allies — has imposed a price cap on Russian marine crude that precludes the use of western marine insurance, finance and other services unless they are sold below $60 per barrels

They are part of the global effort to prevent Moscow from raising funds for its war in Ukraine.

The price cap “was invented by bureaucrats with financial degrees. None of them really understand the oil markets,” Paul Sankey, president and principal analyst at Sankey Research, told CNBC’s Street Signs Asia on Thursday.

“It was a total bomb, it completely failed.”

Sankey stressed that it was tough for oil markets because Russia’s oil supply wasn’t really cut off and “they kept exports at high levels.”

“I heard from a great source that the Saudis were asking around why Russian oil is still flowing,” he said.

“This raises the question of what happens to the sanctions on products because it just doesn’t seem to be working.”

Although volume has remained resilient, the price of Russia’s Ural oil blend has fallen since before the war. According to Reuters, which quoted the Treasury Department, the median price for Russia’s Ural oil blend was $49.48 a barrel in January this year. That’s below the $60 price cap set by the EU and G-7, and down 42% from January last year, according to Reuters.

Before proposed price caps for Russia’s refined products on February 5, member states had yet to agree on a price cap, according to Reuters. It is hoped that an agreement can be reached by Friday.

Read more about Energy from CNBC Pro

Price cap for refined oil products

However, Vandana Hari, founder of analytics firm Vanda Insights, said she too is skeptical about the upcoming restrictions on Russian refined oil products.

“The crude price cap was pretty inconsequential,” Hari told CNBC’s Squawk Box Asia on Thursday.

“I think the nifty product has a cap of around $100 that they are planning [per barrel] for diesel and clean products, and maybe around $45 for dirty fuels like heating oil — are also likely to be insignificant.

According to Hari, Russian oil will find its way into markets that “still welcome it,” like China and India.

“China and India have benefited quite a bit from sharply reduced Russian crude prices over the past year, and the same will happen to Russian refined products,” Hari noted, although Moscow may have more difficulty finding markets for such products, she added.

Both China and India have increased their purchases of Russian oil following Moscow’s invasion of Ukraine, benefiting from reduced prices.

Two uncertainties are the reason OPEC is on hold, says the analyst

Sankey went on to note that “oil friendships are sleazy” and that there are many different ways to ship Russian oil around the world bypassing price caps.

“One of the things that people have highlighted is Malaysian oil. Its crude oil exports to China are 1.5 million barrels per day,” Sankey said. “Malaysia only produces 400,000 barrels a day. I don’t think that’s Malaysian crude. So there’s a lot of stuff going outside of those…theoretical ceilings.”

reopening of China

Separately, Hari said China’s sudden reopening is unlikely to affect oil prices anytime soon.

Hari stressed she doesn’t think oil prices will hit $100 a barrel any time soon as a result of China’s reopening, but it could happen gradually.

There is still a high level of uncertainty surrounding China’s oil demand, she added.

“The initial surge in Chinese demand is evident. We see a lot of travel domestic, international…that’s positive for kerosene. But when will the Chinese economy actually pick up speed again? I think that’s a big question.”

CNBC’s Sam Meredith contributed to this article

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