By Barani Krishnan
Investing.com — A missed opportunity for the West to add to Vladimir Putin’s financial wrath and woe is turning out to be a win for oil market bears and European energy consumers.
Crude oil prices tumbled 4% on reports that the Group of Seven Nations, or G7, was seeking to impose a much higher-than-expected range of $65-$70 a barrel as a cap on the selling price of Russian oil.
Traders had initially speculated a range of $50-$60 for the cap – or $20-$25 less than current market prices – which they expected would anger Putin enough to make the Russian president slash the cap. production or exports of oil from its country, further squeezing already scarce global supplies.
Price caps and a proposed EU embargo on Russian oil are due to start simultaneously on December 12. 5, a day after the OPEC+ oil producers alliance met to review production quotas for the 23-nation coalition.
At its previous meeting in October, OPEC+ ordered a cut of 2 million barrels a day, starting this month, to support crude oil prices which were down about 40% from their March highs.
Crude oil prices jumped about 20% on news of these cuts. But gains have faded in the last couple of weeks, mainly due to news of Covid lockdowns in major oil importer China, which have pushed the market back to the lows seen earlier in the year.
Saudi Arabia’s Energy Minister Abdulaziz bin Salman earlier this week hinted that the oil production alliance could order another cut when it meets on Dec. 12. 4, rejecting a Wall Street Journal report that a 500,000 b/d increase in production could instead occur. Crude oil prices fell off their lows on Abdulaziz’s remarks, but the rebound was modest, at best.
In Wednesday’s session, however, oil market sentiment took a fresh hit on news of a higher-than-expected Russian oil price cap, which traders say could be supportive enough for Putin not to cut off the flow of oil out. from his country. The cap is meant to limit the amount of money Russia can make from its oil to finance the war in Ukraine, though market pundits are divided on whether the initiative will achieve its goal.
“It’s generous, if you ask me, this $65-$70, which is being reported for the cap,” said John Kilduff, founding partner of New York energy hedge fund Again Capital. “At first there was a lot of fear of how the Russians would react if the ceiling was much, much lower. I think this solves the problem. Obviously, the EU wants to ensure a continuous flow of Russian oil to its markets and that works out well for both sides.”
The immediate relief for Europe’s oil supplies that traders saw impacted crude prices on Wednesday.
The New York-traded price, or WTI, fell $3.01, 3.7%, to $77.94 a barrel. Benchmark U.S. crude hit a 10-month low below $76 on Monday.
Trading in London stabilized at $2.95, or 3.3%, at $85.41. Global benchmark crude oil plunged to a nine-month low of under $83 earlier in the week.
The 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 toward its 200-month simple moving average of $72.50 and continue to its 50-month EMA of $70.96,” Dixit said. “An aggressive sell-off above $71 has the potential to deepen the correction to the 200-week SMA of $64.80.”
“With Brent, we are looking at a first swing low of $82.36, then a deeper run into the 200-month SMA of $77.55, followed by the 50-month EMA of $75.20.”
Crude oil prices also came under pressure on Wednesday from large weekly fuel inventories reported by the US government.
U.S. crude inventories fell for the second straight week as refineries ramped up fuel output, instead leading to big builds in gasoline and distillate inventories, data from the Energy Information Administration, or EIA, showed on Wednesday .
it fell 3.7 million barrels in the week to Nov. 18, adding to the previous week’s drop of 5.4 million, the EIA said in its Weekly Petroleum Status Report.
Refining cycles increased nearly 1% last week to 94% of capacity, hitting record levels in the key US East Coast region and boosting inventories of finished gasoline and blending components.
it rose 3.1 million barrels from a build of 2.2 million the previous week and against expectations for a 383,000 barrel increase. The drop accentuated 10-year lows in East Coast gasoline stockpiles, traders said, reflecting the tight supply situation for America’s leading auto fuel in one of the nation’s busiest markets.
it rose 1.7 million barrels, versus expectations for a decline of 550,000 barrels. In the prior week, distillate inventories increased by 1.12 million barrels. The distillates are refined into diesel for trucks, buses, trains and ships, and as jet fuel.