Oil prices experienced a significant surge on Friday amid escalating geopolitical tensions. The ongoing violence in Israel has raised concerns about the possibility of a broader regional conflict. Brent crude, the international benchmark, increased by 5.5 percent to nearly $91 per barrel, while the U.S. benchmark, West Texas Intermediate crude, rose by 5.5 percent to nearly $88 per barrel.
The Israel Defense Forces issued a statement on Friday, announcing that they would continue operating significantly in the northern Gaza Strip. They gave the region’s 1.1 million residents a 24-hour ultimatum to evacuate, as Israeli strikes continued to target the densely populated enclave. Troops are massing nearby, suggesting an impending ground incursion in response to a staged attack by Hamas militants on October 7th.
The turmoil in the Middle East has made markets skittish, particularly given that the region accounts for more than a third of the world’s seaborne oil trade, according to the International Energy Agency. While there has been no direct effect on physical supply, the oil market, like other markets, tends to react based on emotion rather than logic. Market psychology plays a significant role in the extra volatility observed in oil prices during times of war.
Oil prices have been fluctuating for several days. On Thursday, the U.S. Treasury Department sanctioned two shipping companies for violating a $60-per-barrel price cap on Russian crude. This marked the first time penalties were imposed to enforce a rule that experts claim is widely disregarded. The price cap, implemented in December 2022, was intended to undermine the Russian economy and war machine by reducing oil revenue during President Vladimir Putin’s invasion of Ukraine. The Group of Seven nations, along with the European Union, supported this effort.
The Office of Foreign Asset Control (OFAC) in the Treasury Department imposed penalties on Ice Pearl Navigation Corp., a Turkish shipping company, for transporting Russian crude priced at more than $80 per barrel. Lumber Marine, a shipping company based in the United Arab Emirates, was also sanctioned. The OFAC blocked both companies, preventing any U.S. individual or entity from trading or paying for their goods or services. The blocks can potentially be lifted, as the goal of the sanctions is to induce a positive change in behavior.
The Treasury Department’s action serves as a warning to other shipping companies. The price cap policy has succeeded in forcing Russia to explore alternative, more expensive methods of getting its oil to buyers and offering steeper discounts. However, rising oil prices could complicate the G7’s plans to prevent a significant drop in Russian oil exports, which could lead to supply shortages and higher prices. The ultimate goal remains keeping Russian exports high to maintain lower domestic gasoline prices.
The average price of a gallon of gas in the United States was $3.63 on Friday, according to AAA, down 28 cents from the previous year. Other entities are known to have transported Russian oil above the price cap, and it is likely that more companies are violating this rule. Around 70 percent of Russian exports currently use non-G7 transportation services, which do not violate the price cap. The exact number of companies in violation is unclear. However, the temptation to violate the cap is certainly present.
The sanctions against Ice Pearl are connected to a notice issued on April 17th by the OFAC, stating that they were aware of reports of Eastern Siberia Pacific Ocean (ESPO) oil trading above the price cap. The Yasa Golden Bosphorus, which is owned by Ice Pearl, transported ESPO oil priced above $80 per barrel after the cap was implemented. Lumber Marine is accused of carrying oil priced above $75 per barrel on the SCF Primorye, a crude-oil tanker registered in Liberia, transporting oil from Novy Port in northern Russia.
The G7 released a statement affirming that they take all allegations of evasion and illicit activities seriously. They also stated that all coalition members would respond appropriately if industry players violate the price cap rule.
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