DTN Oil

WASHINGTON (DTN) -- Oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced in starting the new trading week, as investors refocused on the risk of supply disruption from Russia amid G7 talks aimed at capping the price on Russian crude and refined products exports in a move that could prompt the government of Vladimir Putin to throttle back oil output.

More details for a G7 plan to cap the price of Russian oil exports began to emerge and the industry appears to be on edge over the possible risks the novel measure could entail.

U.S. Treasury Department on Sunday issued an early guidance of compliance that bars financial institutions and shipping companies in G7 countries from providing tankers, insurance, and other critical financial services for seaborne shipments of Russian oil unless the sales fall under a set price cap. The measure will offer three different price controls, one for crude oil and two for refined petroleum products. The exact level of the price cap has yet to be finalized, but it has been stressed that it must be set above the breakeven costs for Russian producers and shipping and insurance costs. For reference, an average cost for Russian oil production varies between $30 and $40 barrel (bbl), although remote basins in Eastern Siberia and Arctic have a much higher price tag due to harsh climate and infrastructure challenges.

The measure is likely to override the European Union ban on purchases of Russian oil and refined products that is set to take place on Dec. 5 and Feb. 5, 2023, respectively, which should in theory allow for more Russian oil available on the global market. The risk, however, is that Putin could retaliate by cutting oil production, tearing down export contracts that would send global oil prices higher. Such a decision by the Russian president would be catastrophic for the country's oil industry that might never recover from such a heavy blow but highlights the enormous uncertainty for global oil markets.

According to International Energy Agency, Russia currently is the world's third largest oil producer, pumping around 10.9 million barrels per day (bpd), behind only Saudi Arabia with 11 million bpd and the United States with 12.1 million bpd. In the first half of 2022, Russia supplied over 8.2 million bpd of crude and refined products to the global market.

A complete shutdown of Russian oil exports makes it extremely difficult to calculate the associated risks to the global economy, markets and geopolitics.

In financial markets, the U.S. Dollar Index, which has an inverse relationship with West Texas Intermediate, nosedived 0.69% to trade near 108.245 on Monday after hawkish comments by several European Central Bank officials that raised interest rates by a historic 75 basis points last week in an effort to gain control of inflation.

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 base 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.

Near 7:30 AM ET, NYMEX October West Texas Intermediate futures advanced $0.68 to $87.46 bbl, while Brent for November delivery climbed to $93.74, up $0.91. NYMEX October RBOB futures rallied 1.86 cents to $2.4525 gallon, and NYMEX October ULSD futures gained 4.75 cents to $3.6262 gallon.

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