Oil drops as Russian price cap proposal eases concerns about tight supply

24 Nov Oil drops as Russian price cap proposal eases concerns about tight supply

Oil prices declined on Thursday, hovering around two-month lows, as the Group of Seven(G7) nations’ proposed range for a price cap on Russian oil was higher than current trading levels, alleviating concerns over tight supply.

A greater-than-expected build in U.S. gasoline inventories and widening COVID-19 controls in China added to downward pressure.

Brent crude futures dipped 50 cents, or 0.6%, to $84.91 a barrel by 0702 GMT, while U.S. West Texas Intermediate (WTI) crude futures fell by 46 cents, or 0.6%, to $77.48 a barrel.

Both benchmarks plunged more than 3% on Wednesday on news the planned price cap on Russian oil could be above the current market level.

The G7 is looking at a cap on Russian seaborne oil at $65-$70 a barrel, according to a European official, though European Union governments have not yet agreed on a price.

A higher price cap could make it attractive for Russia to continue to sell its oil, reducing the risk of a supply shortage in global oil markets.

That range would also be higher than markets had expected, reducing the risk of global supply being disrupted, said Vivek Dhar, a commodities analyst at Commonwealth Bank in a report.

“If the EU agree to an oil price cap of $65‑$70/bbl this week, we see downside risks to our oil price forecast of $95/bbl this quarter,” Dhar said.

Commonwealth Bank’s $95/bbl forecast was based on the assmption that EU sanctions and a price cap on Russian oil would disrupt enough supply to offset global growth concerns, Dhar said.

Oil prices also came under pressure after the Energy Information Administration (EIA) said on Wednesday that U.S. gasoline and distillate inventories had both risen substantially last week. The increase alleviated some concern about market tightness.

But crude inventories (USOILC=ECI) fell by 3.7 million barrels in the week to Nov. 18 to 431.7 million barrels, compared with analysts’ expectations in a Reuters poll for a 1.1 million-barrel drop.

“EU oil sanctions aside, so long as lockdowns continue to dot the landscape, the oil market’s top-side aspirations will be limited,” said Stephen Innes, managing partner at SPI Asset Management, in a note.

China on Wednesday reported the highest number of daily COVID-19 cases since the start of the pandemic began nearly three years ago. Local authorities tightened controls to stamp out the outbreaks, adding to investor worries about the economy and fuel demand.