DTN Oil

WASHINGTON (DTN) -- Except for the ULSD contract, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange edged higher in early trade Monday following reports the Group of Seven wealthy democracies is discussing a price cap on Russian crude oil sold under Western insurance and shipping mechanisms in a move that could potentially add more Russian oil on the global market while limiting revenues the Kremlin would receive from the sales.

Although the details are still being finalized, with the G7 Summit to conclude on Tuesday, the proposal reportedly includes an exemption to the European ban on insuring shipments of Russian oil that would allow insurers to cover those shipments only if the sales price falls under a cap. No details of what that price cap would look like have been released. G7 nations are set to issue coordinated steps on Tuesday, according to people familiar with negotiations.

The goal in the talks is to keep Russian oil available on the global market, which could help stabilize prices already trending at roughly double pre-pandemic levels, while constructing a mechanism that Western countries could use to restrict Russian revenues from the sales.

Italian Prime Minister Mario Draghi told the meeting that the price cap is "a promising avenue" against Russia because it would cut financial flows to Moscow while reducing inflation, which has surged across the West partly driven by energy prices.

In the European Union, the annual rate of inflation surged to a record high 8.1% in May, with energy being the primary driver of rising consumer prices. Some EU member states recorded a double-digit rise in consumer prices this spring -- well ahead of the United States and the rest of the world.

Analysts say that the real challenge of the agreement is to get commitment from nations outside the G7, notably China and India that have ramped up their purchases of Russian oil under steep discounts. India bought an average of 1 million bpd of Russian crude oil in June compared with 30,000 bpd in February, according to Kpler data. That puts India's purchases at more than a quarter of Europe's total. India's finance minister defended the country's purchases of discounted Russian oil, saying the government is simply doing what was best for its people and the economy.

"My national interest tells me I should buy it where it is cheaper," Finance Minister Nirmala Sitharaman said in an interview with The Wall Street Journal.

Potentially supporting higher oil prices today is an ongoing supply disruption in Libya, where violent protests shut in nearly all of the country's 1.2 million bpd of oil output. Since then, crude production has recovered to 700,000 bpd, according to the country's oil minister, although it's not clear if Libya is able to export any of this oil to the global markets. Analysts believe that additional supplies from Libya could partially offset the loss of Russian oil on the global market but caution that production remains volatile amid political turmoil.

In financial markets, Federal Reserve Chairman Jerome Powell last week raised the probability of a recession in the United States tied to surging inflation and tightening monetary policy. During testimony before the U.S. Senate Banking Committee, Powell cautioned that lowering rapidly broadening inflation without tipping the U.S. economy into a painful downturn would be "very challenging," and that a recession is "certainly a possibility."

"We do understand the full scope of the problem, and we're using our tools to address it pretty vigorously now," Powell told lawmakers last week. "Price stability is really the bedrock of the economy."

Consumer sentiment in the United States slumped to a record low 50 in late June, according to the University of Michigan's closely watched survey, with consumers abruptly lifting their short- and long-term inflation expectations. Nearly 46% of respondents attributed their negative views about the economy to persistent price pressures. Just 13% expect their incomes to rise more than inflation, the lowest share in almost a decade.

Near 7:30 AM ET, NYMEX August West Texas Intermediate futures edged up $0.28 to $107.85 bbl and ICE Brent crude for August delivery advanced $0.47 to $113.61 bbl. NYMEX RBOB July contract gained 0.99 cents to $3.8947 gallon and NYMEX July ULSD futures declined 2.18 cents to $4.3411 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com