DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange fell more than 2% early Wednesday on indications European Union and G7 nations are softening the language dictating looming price cap regulations on Russian oil exports in an apparent effort to cause minimal disruption to Russian oil trade this winter.

Ambassadors from the 27 European countries, G7 nations and the United States are currently discussing a maritime ban on providing shipping and other services for Russian oil shipments unless they fall under a certain price level. The aim of this measure is to take advantage of Western control of the world's maritime insurance, financing, and shipping services to starve Vladimir Putin's regime of revenues to conduct the war in Ukraine.

However, that price level could be as high as $75 barrel (bbl), according to media reports published Wednesday morning, which is well above the current price of $60 bbl for Urals, the Russian crude benchmark, now trading on the global market. Russians were forced to offer steep discounts against the global Brent crude benchmark to sell oil even to their loyal customers in Asia amid a backlash for dealing with Putin's regime.

Additionally, EU leaders have reportedly 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 softening of the language for the price cap comes after several threats were made by the Russian government that Moscow would cut all oil exports to any country that participates in the measure, which could further stoke price volatility and inflation in the West. Additionally, Russian energy giant Gazprom threatened to cut all gas shipments sent via Ukraine as early as next week just as cold winter weather descends upon the region that could see Europeans start tapping storage.

At the same time, some analysts claim Moscow might have amassed enough ships to keep its oil exports at current levels even if it rebuffs the G7 price cap. Independent industry data show 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. The situation remains fluid.

This week's volatility in the oil market also follows comments by Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud, who denied reports suggesting the kingdom was considering a 500,000 barrels per day (bpd) production increase in December, which would have partially reversed a 2 million bpd production cut introduced in October. 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.

Wednesday's move lower came despite the American Petroleum Institute reporting late Tuesday U.S. crude oil stockpiles tumbled 4.8 million bbl last week, nearly six times above consensus for an 800,000 bbl drawdown. If confirmed by official data, this would follow a 5.4 million bbl fall in domestic crude oil inventories for the second week of November. At 435.4 million bbl, U.S. crude oil inventories currently stand about 4% below the five-year average. Stocks at the Cushing, Oklahoma, tank farm, the NYMEX delivery point for West Texas Intermediate futures, decreased 1.4 million bbl through Nov. 18. Gasoline stocks were drawn down 400,000 bbl last week versus an expected increase of 200,000 bbl. API reported distillate inventories rose 1.1 million bbl as of Nov. 18 versus an expected 700,000 bbl draw.

The U.S. Energy Information Administration will release its weekly inventory data 10:30 a.m. EST.

Near 7:15 a.m. EST, WTI futures for January delivery dropped $1.66 to $79.30 bbl, with January Brent futures on ICE falling $2.07 to $86.32 bbl. December RBOB futures on NYMEX declined $0.0696 to $2.4709 gallon, with December ULSD futures falling $0.0213 to $3.4500 gallon.

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