DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved mixed in early trade Wednesday, as the market gauges the impact of reports indicating European Union governments plan on a massive debt-funded fiscal stimulus to offset surging electricity and natural gas prices for households and industries, easing some fear over demand destruction this winter while adding to inflationary pressures in the medium term.

Liz Truss, the United Kingdom's newly anointed prime minister, is reportedly lobbying for a 130-billion-pound stimulus package aimed to bring relief for businesses and consumers from surging energy costs. The measure is estimated to be around 6.5% of U.K. gross domestic product and comes at a huge cost at the time when headline inflation is running at around 10%. Some economists suggest the actual cost might be closer to 9% of U.K. GDP if combined with Truss' other fiscal policies, including canceling a planned increase in corporate tax and cutting national insurance.

Similar measures have been announced in Germany, Finland, and Sweden, among other countries that are sensitive to a cutoff of Russian gas supplies following the Sept. 2 announcement that Nord Stream 1 gas flow to Europe is halted indefinitely. In both 2020 and 2021, Russia supplied roughly 40% of Europe's gas market, followed by Norway and Algeria with 21% and 12% shares, respectively.

The shutdown threatens additional closures of Europe's heavy industry such as steel and fertilizer production that heavily rely on natural gas, as well as hiking energy bills for households ahead of the heating season.

"This has the ingredients for a kind of a Lehman Brothers of energy industry," Finnish Economic Minister Mika Lintila said on Sunday, referring to the investment house that imploded in September 2008.

Fitch Ratings forecasts a full shutoff of Nord Stream 1 would reduce Eurozone gross domestic product in 2023 by 1.5% to 2%, effectively plunging the economic bloc into prolonged recession.

While stimulus policies will likely ease near-term inflationary pressures by offsetting energy costs this winter, the effective increase in disposal income and relief to business suggest they will be higher medium-term implications for consumer prices.

This comes against the backdrop of G7 nations proposing a price cap on Russian oil exports that will build on an incentive system where importers of Russian oil seeking insurance and shipping from companies located in G7 countries, which constitute roughly 80% of the global market, would need to observe the price ceiling. The level of the price cap along with an enforcement mechanism will be decided in further talks with all interested participants outside of the G7, notably China and India.

"We will be seeking input from all interest parties," said German finance minister Robert Habeck.

It's unclear where India and China stand on the price cap agreement. Both countries markedly increased purchases of Russian oil this year despite Western sanctions and reputational risk associated with such transactions. For its part, the Kremlin issued a statement that it would refuse to sell oil to any country that participates in the price cap agreement.

Currently, the price cap is designed to take effect simultaneously with an EU embargo on Russian oil imports on Dec. 5 which could deliver a massive supply shock for markets should Moscow choose to curtail oil exports and shut down fields.

Many questions remain over the viability of the agreement and enforcement mechanism. For instance, shipping insurers have expressed concern that insurance coverage is being used as an enforcement mechanism for the cap, given that underwriters do not typically track the trading price of the cargo. The situation remains fluid.

Near 7:30 a.m. EDT, NYMEX October West Texas Intermediate futures traded $0.23 higher at $87.10 barrel (bbl), while Brent for November delivery climbed above $93 bbl, up $0.22. NYMEX October RBOB futures advanced 3.92 cents to $2.4551 gallon, and NYMEX October ULSD futures added 0.85 cents to a $3.5823 gallon.

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