Third Weekly Drop For Oil As EU Suspends Russian Cap Talks

Meanwhile, a host of indicators suggest that global demand is weakening: File Image/Pixabay

Oil on Friday posted its third consecutive week of losses after the European Union suspended its discussions about ratifying a watered-down price cap against Russia for its invasion of Ukraine.

Even though the cap, which was proposed at $65 to $70 per barrel, was considered to have minimal effect on the former Soviet Union due to the country's estimated cost of production at only $20 per barrel, president Vladimir Putin stated that the sanction would "with high probability" have a negative effect on the energy market.

The talks were suspended because Poland and the Baltic states objected to what they considered to be too generous a proposal to Moscow, but in stating that the talks would resume on Monday Valdis Dombrovskis, vice president of the European Commission, attempted to put a positive spin on the situation by remarking, "Oil is the biggest source of revenue for Russian budget, so it's very important get this right so it really has an impact on Russia's ability to finance this war."

Massimo Di Odoardo, vice president of gas and LNG research at Wood Mackenzie, dismissed the efficacy of the caps altogether: "Those levels of discounts are certainly in line with what the discounts already are in the market … It's something that doesn't seem, as it is placed, like it's going to have any effect [on Moscow] whatsoever if the price is so high."

Vandana Hari, founder of Vanda Insights, said of the Dec. 5 cap imposition deadline that "The fact [it] is not injecting any premium suggests the market is sanguine there will be no major supply disruption, at least nothing on a sustained basis."

Meanwhile, China's zero tolerance Covid policies causing economic chaos in that country plus a perceived decline in U.S. demand due to unexpected gasoline stockpile builds earlier this week contributed to the bearish sentiment on Friday, and Morgan Stanley analysts said in a note to clients, "Our balances point to slight oversupply until the end of 1Q.

"For now, the oil market is faced with macroeconomic headwinds."

West Texas Intermediate on Friday fell $1.66 to settle at $76.28, while Brent fell $1.71 to settle at $83.63.

Augmenting the gloom was Bloomberg, which cited as evidence that global demand is weakening the premium of Oman futures over Dubai swaps falling below $1 per barrel on the Dubai Mercantile Exchange this week (it's plunged about 80 percent in total this month).

PVM Oil Associates data also showed that another market indicator, inter-month Dubai swaps, was briefly in a contango early Friday, signalling bearishness for December through April, before returning to a backwardated structure.