WASHINGTON (DTN) -- Crude and refined products futures rallied 4% on Friday, although all petroleum contracts posted week-on-week losses. The gains came as traders balanced concerns over deeper demand destruction in Europe and the United States fueled by aggressive rate hikes from hawkish central banks against perceived risks of disruption in Russian oil supplies after Russian President Vladimir Putin threatened to freeze all energy exports to countries that choose to participate in a G7 agreement to cap prices on Russian oil flows.
Markets continue to dissect incoming details over a proposed plan by G7 nations to cap the price of Russian oil exports, with plenty of ambiguity remaining over the plan's implementation and enforcement mechanism.
During a panel discussion hosted by the Brookings Institute on Friday, U.S. Assistant Secretary of the Treasury Economic Policy Ben Harris explained the price cap would likely fall into three distinct categories -- crude oil, high-volume refined products and low-volume refined products. He said further that the price cap has yet to be finalized with all interested parties, but that the measure is designed to facilitate the flow of Russian oil into the market, not to block it. Hence, the price cap must be above the marginal production cost of Russian oil that averages between $30 and $40 per barrel (bbl), although remote basins in Eastern Siberia and Arctic have a much higher price tag due to harsh climate and infrastructure challenges.
The plan agreed to on Sept. 2 calls for participating countries to deny insurance, finance, brokering and other services to oil cargoes priced above the yet-to-be-set price cap. However, a big question remains: Will Putin allow the sales of Russian oil under a price cap?
Should Putin choose to cancel export contracts and shut-in production, the market is heading for a massive supply shock this winter. While addressing the audience at the Eastern Economic Forum, Putin signaled just that, saying, "If any political decisions are made that contradict our contractual obligations, we simply will not comply with them. We will not supply anything at all -- not oil, gas, fuel oil or coal. Nothing."
In financial markets, U.S. dollar index, which has an inverse relationship with West Texas Intermediate, nosedived 0.65% to a 1 1/2-week low 108.997 on Friday after European Central Bank on Thursday raised interest rates by 75 basis points -- the largest margin on record. The sharp increase is aimed at lowering inflation across the eurozone which surged 9.1% in August and is projected to top 10% in coming months. At a news conference following the rate hike announcement, ECB President Christine Lagarde warned the ECB was ready to again increase rates aggressively over the next several meetings should inflation continue to rise.
In economic projections released alongside the rate announcement, ECB forecasts inflation would climb to 8.1% this year before cooling to 5.5% in 2023 and coming close to the central bank's target of 2% in 2024.
Cooling inflation should spur greater demand for oil if the central bank avoids tipping the economy into recession with aggressive rate hikes. According to a best-case scenario, ECB expects economic growth to slow to 0.9% next year, narrowly missing recession before recovering to 1.9% in 2024. In the downside scenario where Russia cuts off all natural gas supplies to Europe, the collective economy is seen contracting by 0.9% in 2024 with wide-ranging implications for energy demand.
At settlement, NYMEX October West Texas Intermediate futures rallied $3.25 to $86.79 per bbl, while Brent for November delivery climbed to $92.84, up $3.69. NYMEX October RBOB futures advanced 8.7 cents to $2.4331 per gallon, and NYMEX October ULSD futures gained 3.86 cents to $3.5787 per gallon.
Liubov Georges can be reached at email@example.com