Crude Prices Retreat as EU Agrees to a Price Cap on Russian Crude

Rich Asplund - Barchart - Fri Dec 2, 2022

Jan WTI crude oil (CLF23) on Friday closed down -1.24 (-1.53%), and Jan RBOB gasoline (RBF23) closed down -6.16 (-2.63%).

Crude oil and gasoline prices Friday gave up early gains and closed moderately lower. The action by the European Union (EU) Friday to agree to a price cap on Russian crude at $60 a barrel weighed on energy prices. Crude prices Friday morning initially moved higher after the dollar index (DXY00) tumbled to a 5-month low. Also, easing Covid restrictions in China is bullish for crude as it may boost economic activity that supports energy demand in China, the world's largest crude importer.

A bearish factor for crude was Friday's decline in the crack spread to a 2-1/4 month low. A weaker crack spread discourages refiners from purchasing crude oil to refine into gasoline and distillates.

OPEC+ will meet this Sunday, and the consensus is for the group to keep production unchanged. However, the market will be on guard for a production cut after several delegates said earlier this week that the group might cut production if oil prices continue to falter. On October 5, OPEC+ agreed to cut its collective output by -2.0 million bpd for November and December, a bigger cut than expectations of -1.0 million bpd. Saudi Arabia's energy minister said the real-world impact of the crude production cuts would likely be around 1 million to 1.1 million bpd from November since some members are already pumping well below their quotas. OPEC crude production in November fell 1.05 million bpd to a 5-month low of 28.79 million bpd.

Crude prices moved higher earlier this week after China eased Covid restrictions in some parts of the country, which sparked some optimism about an economic reopening. China on Wednesday lifted lockdowns in Guangzhou's southern manufacturing hub, removed lockdown restrictions in the main urban areas of Zhengzhou, and said it would gradually lift lockdowns in Chongqing. Also, China's top official in charge of fighting Covid-19 said Thursday that China's efforts to combat the virus are entering a new phase, with the omicron variant weakening and more Chinese getting vaccinated. In addition, Beijing is now allowing some Covid patients to isolate at home. Still, China reported a record 38,808 new Covid infections on Sunday, which indicates continued pressure on the government to combat the spreading virus. Analytics firm Kpler said Chinese oil demand could average 15.11 million bpd in Q4, down -4.5% from 15.82 million bpd a year ago.

Oil prices also fell back Friday after the EU agreed to a $60 a barrel price cap on Russian crude oil. The G-7 is finalizing its plans for a Russian oil price cap, which would prevent companies from providing shipping, insurance, and related services for Russian oil unless that oil is sold below the cap price. The $60 a barrel price cap for Russian oil is bearish for prices as Russian Urals grade crude is currently trading at $50 a barrel, so a price cap of $60 a barrel on Russian crude from the EU and G-7 will allow those buying under the cap access to shipping, insurance, and related services and will keep Russian crude flowing through the global market.

In a bearish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week rose +2.2% w/w to 103.13 million bbls in the week ended November 25.

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of November 25 were -8.1% below the seasonal 5-year average, (2) gasoline inventories were -3.4% below the seasonal 5-year average, and (3) distillate inventories were -10.6% below the 5-year seasonal average. U.S. crude oil production in the week ended November 25 was unchanged w/w at 12.1 million bpd, which is only -1.0 million bpd (-7.6%) below the Feb-2020 record-high of 13.1 million bpd.

Baker Hughes reported Friday that active U.S. oil rigs in the week ended December 2 were unchanged at a 2-1/2 year high of 627 rigs. U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signaling an increase in U.S. crude oil production capacity.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.