Oil futures: Brent around $85/b amid price cap stalemate, WTI flips into contango

24 Nov 2022

Quantum Commodity Intelligence - Crude oil futures Thursday were little changed after EU members failed again to agree on a level for the Russian price cap, and while discussions resumed Thursday no compromise found.

Front-month January ICE Brent futures were trading at $85.11/b (1750 GMT), compared to Wednesday's settle of $85.14/b. Brent was trading around $89.50/b prior to news of the higher price cap proposals on Wednesday.

At the same time, Jan23 NYMEX WTI was trading $77.88/b versus Wednesday's settle of $77.94/b.

Market structure has also come under heavy pressure, as Jan23/Feb23 Brent narrowed to near parity and the front WTI spread flipped into contango.

Prices have retreated sharply since reports emerged that a higher-than-expected level of $65 to $70 per barrel was under consideration, rather than the $60/b touted by both Us and EU officials.

"A G7 price cap is reportedly being considered in the $65-70/b range, higher than expected and similar to the discount Russian crude trades. Hence traders pared longs, thinking the cap would have little bite to impact Russian Crude exports materially," said Stephen Innes, managing partner SPI Asset Management. 

Urals is currently available at discounts of around $20/b to Dated Brent, which at current levels puts the Russian grade firmly within the $65-$70/b range.

Hungary was reportedly given an exemption from the price cap, but otherwise there no agreement on the ceiling price as talks wound up for Thursday.

Wranglings over the price ceiling have completely overshadowed this week's EIA data release, which revealed US commercial crude inventories fell 3.7 million barrels last week on a swift recovery in refinery run rates, while another 1.6 million barrels were drained from strategic reserves.

US commercial crude stocks stood at 431.7 million barrels as of 18 November, around 0.5% below last year and 4.2% under the five-year average.

US gasoline stocks, however, climbed for the second consecutive week as domestic demand slumped to its lowest since early October.

Gasoline stocks increased 1.5% to an eight-week high of 211 million barrels as of 18 November, putting inventories within 0.2% of the same week last year.

Stocks have now rebuilt over 5 million barrels from eight-year lows at the start of November, alleviating concerns about supply shortages.

US distillate stocks also built for a second straight week as demand continued to drop below the historic average while net exports slowed further.

Meanwhile, China registered over 31,000 new Covid cases on Wednesday, a record high, the National Health Bureau said, leaving large swathes of the country's key cities under some form of restrictions.