Oil held steady as the European Union considered a higher-than-expected price cap on Russian crude and signs of challenges to demand increased.
West Texas Intermediate hovered around $78 a barrel after losing almost four per cent in the previous session, with volumes likely to be thin due to a US holiday. EU diplomats are optimistic they can reach a deal on Russian oil after discussing capping the country’s seaborne exports at $65 to $70 a barrel. There are some differences between countries on the details, with Poland rejecting $65 as being too soft on Moscow and Greece not wanting to go below $70.
Goldman Sachs Group Inc. said the higher price cap being considered may reduce the risk of Moscow retaliating, although it expressed doubt that the mechanism could be enforced.
Mounting headwinds in the two largest economies threaten energy demand. In the US, Federal Reserve economists briefed policy makers that the chance of a recession in the next year had risen to almost 50 per cent as interest rates climb. In China, officials are pressing on with aggressive efforts to check the spread of Covid-19, ordering lockdowns and movement curbs as daily virus cases swelled to near 30,000 – the most during the pandemic.
The Russian oil price cap won’t have “a huge impact” on total supply, said Hans van Cleef, senior energy economist at ABN Amro. “It is remarkable to see that prices have come down so far based on mainly recession fears and lower Chinese demand.”
Crude has tumbled this month, unraveling the gains made in October after the Organization of Petroleum Exporting Countries and its allies decided to reduce production. While the price-cap plan had been seen as potentially supportive of oil should it result in lower output, a high cap may end up having a minimal impact on trading.
- WTI for January delivery traded 0.2 per cent higher at $78.07 a barrel at 10:19 a.m. in London.
- Brent for January settlement was little changed at $85.47 a barrel.
Key metrics are signalling a weaker market, with WTI’s prompt spread in contango, a pattern that points to ample near-term supply, and Brent also nearing a return to contango for the second time this week. Physical differentials have fallen sharply in recent weeks, with Kazakhstan’s CPC crude the latest to plunge on a combination of weak demand and robust supply.
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