Oil Futures Rise as Traders Monitor Price Cap Negotiations

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Following Monday's volatile session, oil futures nearest delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange advanced on Tuesday. The gains came after Saudi Arabia's energy minister suggested OPEC+ could in fact cut oil production next month, dismissing reports of a surprise output increase, while markets await an expected announcement of a G7 price cap on Russian oil shipments that could potentially disrupt oil flows from Russian ports.

European Union and G7 nations are set to announce on Wednesday a long-expected price cap on Russian oil exports, according to a Wall Street Journal report. Early indications suggest EU leaders proposed adding a new transition period for loadings of Russian crude before an embargo kicks in on Dec. 5, ensuring no short-term supply interruptions.

The exact level of a price cap is yet to be decided by G7 leaders but most likely will be a fixed price between $60 and $65 per barrel (bbl). The price of Urals, the Russian crude benchmark, is currently trading in roughly the same price range. Russian Energy Minister Alexander Novak reiterated Moscow's official position that it will cut oil exports to any country that participates in the price cap mechanism.

The cap would ban companies from providing shipping and other maritime services, such as insurance, brokering and financial assistance, needed to transport Russian oil anywhere in the world unless the oil is sold below the agreed price level. At the same time, some analysts claim Moscow might have amassed enough ships to keep its oil exports at current levels.

Independent industry data showed Russia has secured 18 very large crude carriers, 32 Aframax and 19 smaller tankers in what is known as a "shadow fleet" of older vessels that were acquired over the past several months.

Earlier in the session, oil futures got a leg up from comments by Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud, who denied reports suggesting the kingdom was considering a 500,000-barrel-per-day (bpd) production increase in December, which would have partially reversed a 2 million-bpd production cut introduced in October that took effect this month. The representative from the United Arab Emirates also said it has not discussed changing the bloc's last agreement. OPEC+ meets next on Dec. 4.

Despite Tuesday's higher settlements, sentiment in the oil market remains overwhelmingly bearish due to China's surging COVID-19 caseload and new quarantine measures in the country's largest cities. Beginning Thursday, Nov. 24, Beijing will require negative COVID testing results within 48 hours for entering public places including shopping malls, hotels, government buildings and factories. In addition to deaths caused by the virus, the city reported 154 symptomatic new locally transmitted COVID-19 infections and 808 asymptomatic cases, local government authorities said Monday.

"The number of cases discovered outside quarantine is increasing rapidly at present, and there are hidden transmission risks from multiple places," Liu Xiaofeng, deputy director of the Beijing Center for Disease Prevention and Control, told the media at a news briefing.

Domestically, market participants await the weekly inventory report from the American Petroleum Institute on tap for the release 4:30 p.m. EST followed by official supply data from the U.S. Energy Information Administration Wednesday morning. U.S. oil inventories are projected to have declined by 800,000 bbl for the week ended Nov. 18, with estimates ranging from a decrease of 3.5 million bbl to an increase of 2 million bbl. For the second week of November, commercial oil inventories declined by a sizable 5.4 million bbl, missing expectations for a modest decrease. At 435.4 million bbl, U.S. crude oil inventories currently stand about 4% below the five-year average.

Gasoline stockpiles are expected to have increased by 200,000 bbl from the previous week, with stocks of distillates seen falling by 700,000 bbl. Refinery run rate likely increased by 0.3% from the previous week to 93.2%.

At settlement, West Texas Intermediate futures for January delivery added $0.91 to $80.95 per bbl, with January Brent futures on ICE gained $0.91 to $88.36 per bbl. December RBOB futures on NYMEX rallied $0.1034 to $2.5405 per gallon, with December ULSD futures declining $0.0260 to $3.4713 per gallon.

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

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

Liubov Georges