DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange declined in afternoon trade Friday, with the February ULSD contract falling as much as 4% in reaction to reports the G7 coalition is considering a price cap of $100 bbl for the Russian diesel exports -- a level that will allow Moscow to continue fuel shipments to the global market with minimum interruptions.

The Group of Seven nations along with European partners on Friday began intense negotiations on price limits for Russian fuel exports, which include gasoline and middle distillates ahead of an EU embargo on Russian fuel imports. The embargo comes into full force on Feb. 5. Earlier reports suggested the discussed price cap in the $100 to $110 bbl range is rather generous. For context, diesel futures in northwest Europe are currently trading at about $130 bbl, according to ICE Futures Europe data.

Russian supplies have been recently trading at a large discount to those from elsewhere, with diesel roughly in the $100 bbl range, meaning the impact on Russian producers may not be as disruptive as previously feared. The blueprint for the price cap follows a similar measure already applied to Russian crude exports that have so far resulted in little interruption in the global oil market while the revenues to Kremlin coffers fell sharply at the start of 2023.

While the $100 cap may not be too impactful, the EU's imports ban could be, according to analysts. At the start of 2023, Europe continued to source more than a quarter of its diesel imports from Russia, according to tanker-tracking data. Finding a replacement for these volumes would not be an easy task. A Swiss bank expects Russian oil output to fall below 9 million bpd in 2023 from around 10 million bpd last year.

The U.S. Energy Information Administration estimates the impact of Western sanctions might be deeper, with Russian daily crude output forecast to average 8.5 million bbl this year. Moscow admitted in recent days that Western sanctions will likely reduce its refinery operations but free up more crude oil to sell.

At settlement, West Texas Intermediate futures for March delivery declined below $80 bbl to $79.68 bbl, down $1.33 on the session, and Brent March futures on ICE fell $0.81 to $86.66 bbl. NYMEX RBOB February contract dropped back $0.0235 to $2.5886 gallon, and front-month ULSD futures plummeted $0.131 to $3.2655 gallon.

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