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G7 Price Cap on Russian Oil Isn’t Providing the Market with Confidence

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

G7 Price Cap on Russian Oil Isn’t Providing the Market with Confidence
 
Harry Altham
Energy Analyst, EMEA & Asia

Both Brent and WTI have made $2 up-moves this morning after the G7 agreed to implement a price cap on Russian oil, which has restored an element of uncertainty to Europe’s oil security dilemma, itself a prevalent issue since the invasion of Ukraine. Today is likely to be marked by suppressed liquidity and excess volatility due to the Labour Day Holiday in the United States, which could be particularly pronounced around the time of the OPEC+ meeting. Here, there are increasing expectations that OPEC+ may either cut production or keep it steady to balance the market, despite opposition among some of its members. OPEC+ estimations place the market in a supply surplus, which is in contradiction to many other energy and financial institutions which are reporting significant tightness in oil fundamentals. Meanwhile, it is our understanding that stumbling blocks remain in the Iran Nuclear Negotiations, with little public indication from any of the involved delegations that a deal may be close.  

oil price cap has been agreed. Markets doubt this will help europe in its search for oil
Markets have been unequivocal in their reaction to the imposition of an oil price cap by the European Union, despite the theoretical implication of bearishness from a collar. The decision is also being linked with the announcement by Gazprom to indefinitely extend the maintenance work on Nord Stream 1, which has caused Dutch TTF to jump €50/MWh to €264/MWh this morning. The market appears to see greater value in present ownership of oil in light of the announcement, as front-month futures have accelerated ahead of the further-dated contracts in a strengthening of the backwardation structure in both Brent and WTI. Russia has previously stated that it will refuse to sell oil to countries that impose a price cap, while it is simultaneously thought that the G7 nations are not planning on purchasing Russian oil after the New Year (only Italy, France, Germany and Japan [recommenced imports in August] still purchase oil from Russia as of September 2022). It remains unclear as to the true global reach of the price cap, the level at which it would be imposed, its implementation period or its consequent effect on the E.U. ban on seaborne Russian exports, but we preliminarily expect that this will cause Europe further difficulties in procuring oil over the next few months. 

In a week where Brent’s November 2022 contract lost almost $10, we have seen a significant drop in the WTI money manager net long, giving a strong indication that the market is increasingly concerned about China’s latest COVID outbreak, and the health of the global economy. It is the fourth least bullish that WTI net positioning has been since the beginning of 2021; two of those weeks have fallen during the last month. This morning’s price support comes despite the 20-year high the U.S. dollar has achieved against the euro, at one point reaching $0.988. Today’s OPEC+ meeting will be key; even a small production cut could determinately shift momentum in the favour of those who forecast Q4 average prices above the $100 mark.  

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Source: CFTC, StoneX

 

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