Oil has worst week since March amid what Putin calls 'stupid' price cap

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By Barani Krishnan

AiVIF.com -- Vladimir Putin showed his irritation on Friday with the West’s price cap on Russia’s oil, calling it “a stupid proposal” among other things. The market seemed to think otherwise though.

After a brief and slight pop on the Russian president’s comments, crude prices settled down for a sixth day straight day in a week where the front-month contracts swung as much as $4 a barrel a day on supply uncertainties spawned by the price cap and on recession fears in the United States and Europe.

“The short-term crude demand outlook has deteriorated significantly as no one has a strong handle on how bad a recession will hit the U.S. economy,” said Ed Moya, analyst at online trading platform OANDA. “Energy traders are going to trade very technically here and probably look to defend the $70 level for WTI crude.”

WTI, or New York-traded West Texas Intermediate crude for January delivery settled down 44 cents, 0.6%, at $71.02 per barrel. The U.S. crude benchmark ended the week down $9.28, or 11.6%, making it its worst week since the week ended March 25. WTI’s session low was $70.11 — a bottom not seen since Dec 21, 2021 and practically a dime above the key $70 support.

London-traded Brent crude for February delivery settled down 5 cents, or 0.07%, at $76.10. For the week, the global crude benchmark down more than $9.47, or 11.%. Brent’s intraday low was $75.14 — a trough not seen since Dec 23, 2021 and less than cents above the key $75  support.

As of Friday, WTI was down 4.8% for all of 2022. In comparison, the U.S. crude benchmark was up 73% in March when it traded just shy of $130 a barrel. Brent was off 1.4% on the year, after being up 80% in March when it rose to just short of $140 a barrel.

The oil trade, meanwhile, was bracing for more volatility in 2023 as the West’s price cap on Russian oil and headwinds to global growth offset potential demand surges and supply crunches.

“Choppy is the word to describe how oil markets are likely to be in the coming days and weeks,” said John Kilduff, partner at New York energy hedge fund Again Capital. 

“There are worries about Europe in recession and of central banks over tightening to get a handle on inflation. Then, you have the occasional headline of a pipeline in trouble, like Keystone. Anything could yank the market two bucks either way on any day. The market is nervous as a tick.”

The past two sessions were a perfect example of the price swings that could come ahead in oil.

In Thursday’s business, crude initially rallied on reports of a tanker pile-up in Turkish waters, with authorities there apparently checking one vessel after another for oil of Russian origin.

The U.S. Treasury then issued a statement, saying there was no need for Turkish authorities to do checks beyond the declaration made by shippers. It also said the government in Ankara was working quickly to resolve the issue and that Turkey shared U.S. interests in maintaining a well-supplied oil market.

Crude prices fell after that as it became clear that there were no supply snafus due to the price cap. 

Thursday’s swings in oil were exacerbated by the closure of the gigantic 622,000 barrel-per-day Keystone pipeline after an oil spill. The pipeline carries heavy Canadian crude from Alberta to the U.S. Midwest and Gulf Coast. Its shutdown in principle put a hefty amount of crude back into the market at the same time that global economic slowdowns raised fuel demand fears.

Sentiment remained bogged down in Friday’s session by worries that the U.S. Federal Reserve and the European Central Bank could resort to longer rate hikes through 2023 despite both signaling lately that their aggressive monetary tightening in recent months could be headed for a pivot.

One problem for central banks to stay on track with rates: inflation that simply refuses to be tamed easily. Friday’s U.S. Producer Price Index data for November grew at a faster-than-expected rate, disappointing policy-makers counting on weaker price pressures that would allow them to ease up on monetary tightening that could hurt growth.

On the price cap front, Putin said Russia might retaliate with production cuts, although it would have to discuss that first with its allies in the OPEC+ global oil producers led by Saudi Arabia. 

"We are thinking about this, there are no solutions yet,” the Russian president said, referring to the price cap and Moscow’s likely response, that could include production cuts. He added that “concrete steps” will be outlined in a presidential decree “that will be released in the next few days”.

Since Monday, the Group of Seven, or G7 club of rich nations, along with the European Union and other allies have imposed a $60 selling price limit on Russian oil.

The move has had traders scratching their heads to figure out a landing price for Urals — the reference for Russian oil, which is one of the world’s more important benchmarks for crude other than the Dubai Light and the ubiquitous WTI and Brent.

In theory, the price cap shouldn’t matter much as it does now as Urals on their own were quoted at around $60 per barrel just before the limit announced by the West.

In practice though, the cap matters a lot — to Putin at least. 

His remarks on Friday showed how annoyed he was at the idea of the United States and its allies in trying to stop his advance in Ukraine by using Russia’s own oil as a weapon against him — never mind that the Russian president himself was holding the West hostage to Russian energy just months ago when he threatened to cut off gas supplies to Europe.

"This will lead to the collapse of the industry itself, because the consumer will always insist that the price be lower,” Putin said. “The industry is already under-invested, under-funded, and if we listen only to consumers, then this investment will be reduced to zero.”

"All this will lead at some stage to a catastrophic surge in prices and to the collapse of the global energy sector. This is a stupid proposal, ill-conceived and poorly thought-out."

Putin doubled down on Friday on his Ukraine mission, dismissing Western attempts to squeeze Russia’s oil earnings via the price cap in order to slow down its war machinery. 

Putin alluded to the $60-per-barrel limit set by the West as proof that Russia’s finances won’t be hurt, saying that it corresponded with the level that Russia was currently selling its oil at. 

What the Russian president perhaps failed to realize was that traders were betting on the same thing — that the cap won’t really matter to Moscow unless WTI and Brent prices go a lot higher — making Putin’s threats of retaliation seem hollow for now.