DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Friday's session sharply higher on growing speculation China could soon scrap quarantine controls on international air travel in a first major step to ease zero-COVID policies, while the potential risk of supply disruption out of Russia tied to the G7 plan to cap the price of seaborne oil exports in response to Vladimir Putin's unprovoked war in Ukraine further boosted risk-on sentiment.

After months of intense negotiations, G7 countries reached an agreement on Friday to enforce a fixed price on Russian oil exports but only at the point of first sale on land, meaning the resale of the same oil at sea won't be subject to the regulation. Additionally, sales of Russian petroleum products, such as gasoline and diesel fuel, won't fall under the price-cap plan, dropping an earlier proposal for a three-tier price cap.

Many details of the agreement are still murky, including the exact price level at which Russian oil would be sold under Western shipping insurance or enforcement mechanism that governs those transactions. The original idea behind the price cap was to bar firms located in G7 countries from providing critical maritime services for the waterborne shipment of Russian oil unless the oil is sold at or below a set price cap.

Because much of the world's maritime services are based in G7 countries, the Western partners were aiming to effectively dictate the price at which Russia can sell its oil on global markets. The fact that the language of the price cap agreement has been softened to the point of first transaction means G7 nations seek to avoid disruption of Russian oil flows on the global market. Russian officials repeatedly threatened to cut oil supplies to any country that participates in the G7 price cap proposal. Regardless of the final text, traders are likely to shun away from Russian oil in coming days before all rules and regulations governing sales of Russian oil are determined.

The next question is what happens to an EU ban on maritime services for Russian oil shipments. So far, signs indicate EU will move forward with an embargo set for Dec. 5, but it remains unclear whether they will sign on to the G7 price cap that allows Russian oil exports to flow using European maritime services.

Underpinning gains for the oil complex Friday are reports Chinese officials are moving expediently to remove some restrictions contained in Beijing's zero-COVID policy, starting with easing controls on international travelers and penalty system for airlines boarding infected individuals. The latest trigger came in the form of a transcript attributed to former state official Zeng Guang, who said at an investment conference organized by Citigroup in Hong Kong that Beijing will substantially change its zero-COVID policy next year.

China is the world's largest oil importer and changing those restrictions could give a significant boost to global fuel demand. Regardless of the exact path to reopening, Beijing will likely lift COVID restrictions gradually contingent on the speed of the viral spread and some sort of mass-vaccination program.

So far, China's zero-COVID strategy relied heavily on lockdowns and mass testing to stamp out infections that have hammered the country's economy over the past two years. China's economic growth rebounded 3.9% in the third quarter, buoyed by manufacturing and solid exports, but continued growth is dependent upon abandoning COVID-19 restrictions.

U.S. dollar plummeted more than 2% against a basket of foreign currencies to 110.774, with the offshore yuan strengthening more than 1% in Asian trading to a one-week high of 7.2441 per U.S. dollar. Stocks in Shanghai and Hong Kong posted their best week since at least July 2020. The reaction underlines how sensitive markets are to the so-called "reopening trade" as investors blamed Beijing's COVID controls for the cratering consumer spending and faltering economy since the pandemic broke out in early 2020.

At settlement, NYMEX December West Texas Intermediate spiked $4.44 to $92.61 bbl, with January Brent, the international crude benchmark, surging to $98.57 bbl, up $3.90 bbl. NYMEX December RBOB futures advanced $0.0409 to $2.7348 gallon, and December ULSD futures rallied $0.0495 to $3.9148 gallon.

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