Oil extends drop from 7-year high as Russia offers gas reprieve

Oil extended losses after Russia offered to ease Europe’s natural gas crisis and traders weighed the prospect of the U.S. releasing crude from its strategic reserves.

Futures in New York fell 2.4 per cent, after closing 1.9 per cent lower on Wednesday. Russian President Vladimir Putin said record volumes of natural gas could potentially be exported to Europe this year as the continent faces an energy crunch. Gas prices fell further on Thursday after his remarks, and lower rates could potentially mean less incentive for consumers to shift to oil.  

Russian Deputy Energy Minister Pavel Sorokin also spoke directly to the oil market on Thursday, saying OPEC+ shouldn’t allow the market to overheat, according to Interfax. The group, which includes Russia, on Monday agreed to continue with its plan to raise supply gradually, ignoring some calls to boost output faster to help calm prices. The oil market is balanced at a price of $45 to $60 a barrel, he said.  

U.S. crude was at its biggest discount to the global Brent benchmark in 17 months after a report that the government was considering releasing its emergency oil reserves. The nation could release up to 60 million barrels from its strategic reserve if the plan is implemented, but that would only provide “modest and transient” relief to prices, according to Goldman Sachs Group Inc. 

A pullback in crude has been on the cards with prices moving into overbought territory earlier this week. The energy crunch from Europe to Asia raised the prospect of greater demand for crude and oil products ahead of winter. Russia’s intervention on Wednesday has since started to cool markets.

“If Russian gas export will, in fact, be increased the additional oil demand created by the gas-to-oil switch will evaporate and under this scenario the highest price of 2021 might have been achieved yesterday,” said Tamas Varga an analyst at PVM Oil Associates. “But this is a big if.”

Prices

  • WTI fell 2.4 per cent to $75.58 a barrel as of 9:33 a.m. in London
  • Brent declined 1.7 per cent to $79.73

The comments from Energy Secretary Jennifer Granholm on a potential release were about sending a message to OPEC+ to add more supply, said RBC Capital Markets analysts including Helima Croft. However there are limits to using the SPR to cool gasoline prices, they said, with higher crude supply not necessarily equating to more refined products.

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