When the G7, EU, and Australia announced a $60 cap on Russian oil exports on 2 December, crude oil prices slumped in disappointment. Brent crude fell five sessions in a row from $86.88 on 1 December to $76.82 on 9 December.
The problem is that not all oils are equal. The main Russian oil price benchmark, Urals, has traded at a $20-35 discount to Brent crude ever since Russia invaded Ukraine in February 2022.
As of 6 December, Urals oil was trading at $56.34 – well below the price cap.
Other factors may also weigh in to send oil prices lower rather than higher.
The cap only applies to limited countries
Only the G7, EU and Australia are participating in this price cap arrangement. Significant oil importers Korea, China, and India are free to continue buying Russian crude at market prices. This is particularly significant for China, which imports Russian crude through the Eastern Siberia–Pacific Ocean oil pipeline.
With the EU refusing to buy Russian oil, India and China appear to be using their buying power to reduce prices. However, with countries now allowed to purchase Russian crude at a limit of $60, their leverage beyond $60 may be limited.
The US won’t be refilling the SPR above $72
Over the past six months, the US government sold close to 180 million barrels of oil from the Strategic Petroleum Reserve to bring oil prices down. Now that the program is ending, President Biden plans to refill the SPR at $67-72 per barrel, according to an 18 October factsheet.
Assuming the government goes ahead with these purchases, it could put a floor under WTI crude of around $70 – slightly below the 12 August price of $73.09.
In fact, the US may not even refill the SPR because, between fiscal years 2023 and 2027, another 173 million barrels are scheduled to be sold.
An economic slowdown may reduce demand and prices
The most figures from the US Energy Information Agency show US gasoline demand dropped below 2021 levels in April and, for the past five months, has been consistently around half a million barrels a day below 2021 levels.
Less than 1% of this fall could be attributed to the 7-8 million electric vehicles sold in the past year, according to BTU Analytics. The rest is likely due to a weaker US economy.
According to the US Bureau of Economic Analysis (BEA), the US economy grew by a sluggish 2.9% year on year in the third quarter of 2022. This followed two quarters of negative growth between January and June 2022.
While this growth does appear to be an economic rebound, the higher interest rates and increased cost of living could combine to once again depress the world’s largest economy and reduce oil demand.
How to trade oil
There are three alternative methods of trading in oil:
- Oil-related exchange-traded funds (ETFs) such as OOO and FUEL
- Oil-related stocks such as KAR and WDS
- Oil spot, futures and options prices using CFDs
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Source: IG