Oil sinks for third week as EU strives for price-cap compromise

Oil headed for a third weekly loss as the European Union weighed a higher-than-expected price cap on Russian crude and slowdown concerns threatened the demand outlook.

Brent traded below US$86 a barrel, putting the global benchmark on course for a drop of more than 2 per cent this week. European diplomats remain locked in talks over how strict the cap should be, highlighting disagreements between member states. Negotiations could resume on Friday (Nov 25) but may also slip beyond that.

Signs of challenges to demand have been accumulating. In China, the world’s largest oil importer, daily Covid infections hit a record this week, prompting officials to step up curbs. The Institute of International Finance, meanwhile, forecast that the world economy will be as weak next year as it was in 2009 after the financial crisis as the conflict in Ukraine drags on.

Crude has declined this month, overturning the gains made in October after the Organization of Petroleum Exporting Countries and allies agreed to reduce production. In a sign of the group’s stance ahead of its meeting next month, Iraqi Oil Minister Hayyan Abdul Ghani gave support to the coalition and signalled that he’ll co-ordinate positions with de facto leader Saudi Arabia.

“Crude has been grappling with bearish factors since past few sessions amid recessionary fears and increase in China Covid cases,” said Ravindra Rao, head of commodities research at Kotak Securities in Mumbai. “The price cap on Russian oil between US$65 to uS$70 won’t have much of an impact” as it’s already trading at those levels, he added.

Widely-watched differentials signal a weaker market, with WTI’s prompt spread in contango, a pattern pointing to ample near-term supply. The gap was 12 cents a barrel, compared with 80 cents in the opposite, bullish backwardated structure two weeks ago. Brent’s prompt spread has narrowed to 10 cents a barrel in backwardation versus US$1.58 a fortnight ago.

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The price-cap plan forms part of the response by the EU and the Group of Seven to punish President Vladimir Putin for the invasion of Ukraine by reducing Moscow’s revenue, while at the same time allowing other states to continue imports. The introduction of a cap by western countries will “with high probability” have a negative effect on the energy market, Putin said. BLOOMBERG