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Price cap Proposal Pushes Brent Towards Contango

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

European divisions appearing in the Russia price cap move
 
Harry Altham
Energy Analyst, EMEA & Asia

Oil looks set to end the week lower once again, as technical indicators demonstrate significant weakness in physical markets, particularly out of Asia. This morning, the complex is capitalising on dollar weakness; part of the greenback’s losses this week came from dovish Federal Reserve minutes, which indicated that benchmark interest rate increases would increase in smaller doses from December. The mini-rally has pushed crude benchmark spreads above near-year lows reached yesterday, in which the Brent prompt spread briefly went into contango. The technicals give scope for further price recovery today as the five day moving average of $86.68 has been breached, while the 14-day RSI remains below 40 – considerably below the one-month average of 49. 

 
european divisions appear
Part of the price recovery seen today is due to divisions appearing within the European Union regarding the $65-$70 Russia price cap, which raises the possibility that a tiered system may be required to get any deal over the line. Countries such as Poland and Lithuania believe that a price cap above $65/bbl is too lenient and will provide Russia with enough revenue to sustain its operations in Ukraine. Meanwhile, Greece is concerned about the impact of too low a price cap on the global fuel oil market – in which their economy-dependent maritime services is reliant. Any divisions, and subsequent delay to any agreement, is bullish for oil in the short-term. This is because the uncertainty is likely to deter prospective buyers due to a widespread unwillingness to bypass sanctions (outside China and India), plus the risk of being unable to secure insurance. Dmitry Peskov, Russia’s Presidential Spokesman, suggested that Russia could be open to trading at the $65-$70 level, dependent on further ‘analysis’. That the price cap is now being talked about as a realistic proposition makes it a key factor as we move closer to 2023; it could provide some much needed relief to global consumers who have suffered from high prices since the build-up and launch of the war in Ukraine. 
 

Russia has responded to the impending sanctions against its oil industry by ramping up seaborne exports from its western ports, defying expectations of a gradual shift away from Russian diesel by the European Union. The figure for December is thought to be around 600k bbd (which does not include oil transported by rail to those ports, according to Bloomberg [who obtained the data]). There has been pronounced tightness in diesel markets for some time, which is reflected in the strength of the ICE Gasoil forward curve. However, we believe the arrival of sanctions against these diesel cargoes will significantly tighten diesel markets from February onwards. We therefore believe the second/third month gasoil spread’s backwardation is too strong, as we expect there to be considerably greater price pressure for inbound diesel cargoes between January and February; the uncertainty of January’s supply flows is also likely to cause sharpened volatility in the spread.

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