Oil Dips As "Open Interest" In The Commodity Declines, Say Analysts

Still, oil could possibly rise to $150 in the near term: File Image/Pixabay

In the aftermath of a sharp pullback last week when crude prices neared $140 per barrel, oil on Tuesday slipped again, reportedly due to the European Union's indecision whether to ban crude imports from Russia due to its invasion of Ukraine.

West Texas Intermediate for April delivery, which expired later Tuesday, fell 36 cents to settle at $111.76 per barrel, and the more active May contract fell 70 cents to settle at $109.27 per barrel; Brent for May settlement dropped 14 cents to settle at $115.48 per barrel.

This came on the heels of Germany reiterating its rejection of the proposed Russian embargo, joining Hungary in opposition; EU leaders are set to discuss the issue further on Thursday, and any decision will need to be agreed by all 27 states.

Julian Lee, commodities analysts for Bloomberg, pointed out on Tuesday that "large parts of Germany would grind to a halt" if the flow of oil from Russia was halted.

He said, "While neighbouring Poland is weaning itself off the Kremlin's crude, Europe's industrial powerhouse remains so dependent that it would struggle to support the ban on Russian fuel supplies that's under debate in the European Union this week."

If a Russian embargo is approved, or if Russia itself were to cut the flows, "the markets served by these refineries would find themselves dependent on securing scarce volumes of refined products from elsewhere, and reliant on expensive delivery by truck and rail……for the Czech Republic and Slovakia, but most of all for Germany, the cost of sanctioning Russia oil would be prohibitive," according to Lee.

Still, European refiners are increasingly using most of their own oil in wake of the Russia/Ukraine war: Bloomberg on Tuesday cited the example of Norway, reporting that over half of crude lifted from Norway's Mongstad terminal so far this month (mostly the Johan Sverdrup grade), has been shipped to three normally regular buyers of Russian oil: Poland, Lithuania, and Finland.

All of this is of course playing out against an unchanging backdrop of global market tightness, and on Tuesday analysts told media that prices could easily rise to $120-$150 per barrel in the near future, especially in light of the Organization of the Petroleum Exporting Countries (OPEC) refusing to boost output and U.S. shale limited in its ability to pump all-out.

As for oil trading behaviour, Francisco Blanch, head of commodities research at Bank of America, noted that while some of oil's weakness last week was related to the liquidation of long positions linked to increased margin calls, this week "open interest has actually fallen in oil despite the incredible risk that we are running here with the war in Ukraine still unfolding."

Rebecca Babin, senior energy trader at CIBC Private Wealth Management, added that, "Market participants have realized they have very little edge in calling political end games and don't want to keep getting chopped up trying."