Oil down almost 4% as ‘generous’ Russia price cap snuffs OPEC cut speculation

By Barani Krishnan

Investing.com -- A lost opportunity for the West to add to Vladimir Putin’s ire and financial pain is turning out to be a win for oil market bears and European energy consumers.

Crude prices tumbled 4% on reports that the Group of Seven nations, or G7, was looking at imposing a much-higher-than-thought range of $65-$70 a barrel as a cap for the selling price of Russian oil. 

Traders had originally speculated on a range of $50-$60 for the cap — or $20-$25 lower than current market prices — which had been expected to anger Putin enough for the Russian president to drastically cut production or exports of oil from his country, further squeezing already tight global supplies.  

The price cap and a proposed EU embargo on Russian oil are expected to begin simultaneously on Dec. 5, a day after the OPEC+ alliance of oil producers meets to review output quotas for the 23 nations in the coalition. 

At its prior meeting in October, OPEC+ ordered a 2 million-barrels-per-day cut, to begin this month in order to shore up crude prices that had fallen some 40% from March highs. 

Crude prices did jump some 20% on news of those cuts. But the gains fizzled over the past two weeks, mainly on news of Covid lockdowns in top oil importer China that pushed the market back to the lows seen at the start of the year. 

Saudi Arabia’s Energy Minister Abdulaziz bin Salman earlier this week hinted that the oil-producing alliance could order another cut when it meets on Dec. 4, dismissing a report by the Wall Street Journal that an output hike of 500,000 barrels per day might happen instead. Crude prices came off their lows on Abdulaziz’s remarks but the rebound was modest, at best.

In Wednesday’s session, however, market sentiment in oil took a fresh blow on news of the higher-than-expected price cap for Russian oil, which traders said might be benign enough for Putin not to disrupt the flow of oil out of his country. The cap is meant to limit the amount of money Russia can earn from its oil to fund the war in Ukraine, although market experts are split on whether the initiative will even meet its aim.  

“It’s generous, if you ask me, this $65-$70, that’s being reported for the cap,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “There was so much fear initially how the Russians would react, if the cap had been much much lower. I think that solves the problem. Obviously, the EU wants to ensure continuous flow of Russian oil to its markets and this works out well for both sides.”

The immediate relief for Europe's oil supplies that traders saw took a toll on crude prices Wednesday.

New York-traded West Texas Intermediate, or WTI, settled down $3.01, 3.7%, at $77.94 per barrel. The U.S. crude benchmark hit a 10-month low beneath $76 on Monday.

London-traded Brent settled down $2.95, or 3.3%, at $85.41. The global crude benchmark slumped to a nine-month low of under $83 at the start of the week.

Technical charts pointed to further weakness for both crude benchmarks, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“WTI’s decline could extend towards its 200-month Simple Moving Average of $72.50 and follow through with the 50-month Exponential Moving Average of $70.96,” said Dixit. “An aggressive sell-off beyond $71 can potentially deepened the correction towards the 200 week SMA of $64.80.”

“With Brent, we’re looking at a first swing low of $82.36, then a run deeper into the 200-month SMA of $77.55, followed by the 50-month EMA of $75.20.”

Crude prices were also pressured Wednesday by large weekly fuel stockpile builds reported by the U.S. government.

Crude stockpiles in the United States fell for a second week in a row as refiners stepped up fuel production, leading to large builds instead in gasoline and distillate inventories, data from the Energy Information Administration, or EIA, showed Wednesday.

Crude inventories fell by 3.7 million barrels in the week to November 18, adding to the previous week’s decline of 5.4 million, the EIA said in its Weekly Petroleum Status Report. 

Refinery runs rose by almost 1% last week to 94% of capacity, hitting record highs in the key U.S. East Coast region and boosting inventories of both finished gasoline and blending component products.

Gasoline stockpiles rose by 3.1 million barrels versus a build of 2.2 million the previous week and against expectations for a 383,000-barrel rise. The drop accentuated the 10-year lows in gasoline stockpiles in the East Coast, traders said, reflecting the tight supply situation for America’s premier automobile fuel in one of the nation's busiest markets.

Distillate stockpiles rose by 1.7 million barrels, versus expectations for a 550,000-barrel drop. In the previous week, distillate inventories rose by 1.12 million barrels. Distillates are refined into heating oil as well as diesel for trucks, buses, trains and ships, and as fuel for jets.