Oil Flat As Demand Fears Collide With Supply Shortage Angst

Meanwhile, the countdown for the Russian price caps implementation has begun: File Image/Pixabay

The beginning of the week saw the same bi-polar trading pattern for crude as suggestions of a supply boost to a painfully tight market conflicted with worries that Covid lockdowns in China will ruin demand.

Brent settled down 0.2 percent at $87.45, while West Texas Intermediate settled 0.4 percent lower at $79.73.

The session saw a report suggesting that the Organization of the Petroleum Exporting Countries (OPEC) was considering raising its production level, only to have this quashed by Saudi Arabia, with its energy minister prince Abdulaziz bin Salman stating that "The current cut of 2 million barrels per day [bpd] by OPEC+ continues until the end of 2023….if there is a need to take further measures by reducing production to balance supply and demand, we always remain ready to intervene."

RBC Capital Markets analysts stated in a note, "The Saudi ministry's strong statement denying an increase is being actively considered, and suggestions that further cuts are not entirely off the table, should give market participants pause about predicting a policy reversal."

This was accompanied by China continuing its zero-tolerance Covid policy by locking down regions where outbreaks were occurring, regardless of the mild symptoms of the virus; and concerns that only two weeks are left before the European Union's price cap against Russia for invading Ukraine come into effect, details of which could be learned as early as Wednesday.

For his part, Alexander Novak, deputy prime minister of Russia, issued a statement declaring that the former Soviet Union won't supply crude or oil products to nations implementing the cap; instead, it will redirect its supply to "market-oriented partners" or will slash production.

Novak added that the cap will lead to a decline in investment "and a potential deficit in oil supply and any commodity where such a mechanism is applied."

The International Energy Agency said in a report that Russia may lose close to 2 million bpd of output by the end of March compared with prewar levels, and pump an average of just 9.6 million bpd next year.

As for the recent notion, all but forgotten this week, that China would relax its draconian Covid policies, Paul O'Connor, head of the multi-asset team at Janus Henderson, said, "The reopening rally [in China] was played way too quickly, that's not going to come until the second quarter [of 2023] at least…China was an important catalyst for rallies in the past few weeks, but investors are questioning whether they've been too optimistic."