Oil Retreats as Demand Concern, US Price-Cap Plan Dominate Trade

Oil declined at the start of the week amid mounting speculation that global demand is weakening, and as investors assessed a welter of details about a bold US-led plan to try to cap the price of Russian crude.

Oil Retreats as Demand Concern, US Price-Cap Plan Dominate Trade

West Texas Intermediate sank toward $85 a barrel after a volatile ride last week, when prices swung in a wide arc only to end little changed. There are concerns the outlook for consumption is worsening as global growth slows and China maintains its strategy of controlling Covid-19 by curbing activity.

In the US late Friday, the Treasury issued rough compliance guidelines for the proposed cap on Russian oil, focusing on the documentation needed by the private sector to adhere to the program, which is meant to kick in from December as Europe tightens sanctions on flows. Deputy Treasury Secretary Wally Adeyemo said that Moscow would have no choice but to participate.

Crude has sunk by nearly a third since June, shedding all the gains since Russia’s invasion of Ukraine. The reversal has come as central banks including the Federal Reserve tighten policy to quell inflation. The US price-cap plan, which is backed by the Group of Seven, is meant to reduce Moscow’s income from oil sales, squeezing the flow of funds used to finance the war.

“Now it seems like potential demand weakness is taking center stage, in terms of recession fears and prolonged restrictions in China,” said Sean Lim, a Malaysia-based oil and gas analyst at RHB Investment Bank Bhd.

In China, the world’s largest oil importer, authorities have been intensifying lockdowns and restrictions as a key Communist Party meeting looms. Among places now facing curbs are Chengdu, the country’s sixth-largest city, parts of Guiyang, and at least one university campus in the capital, Beijing. Nationwide, there were 1,138 new infections reported for Saturday.

Iranian nuclear talks were also in focus as the UK, France and Germany said at the weekend that they have “serious doubts” about Tehran’s commitment to a new agreement. Should a pact be agreed it could pave the way for greatly increased flows of Iranian crude to the global market.

Widely watched crude market time spreads have narrowed in recent weeks, signaling an easing of near-term tightness. Brent’s prompt spread -- the difference between its two nearest contracts -- was $1.07 a barrel in backwardation, more than $1 lower than two weeks ago.

Last week, the Organization of Petroleum Exporting Countries and its allies including Russia twinned a token cut in supply with a warning that the grouping was ready to act again should circumstances change.

“The fact that OPEC stands ready to respond to market changes is a plus point for prices,” said Lim at RHB. “That will provide a base support to the market.”

 

 

 

 

source of the news: bloomberg

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