DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled Wednesday's session with losses between 2.5% and 4%. The losses were in reaction to reports suggesting G7 and European leaders are seeking to soften the blow to Russian oil trade through a more lenient version of a price cap, including a higher price level and scrapping some penalties.

Oil futures this week quickly erased the risk premium tied to the potential disruption of Russian oil flows by an upcoming embargo and sanctions after G7 leaders indicated they are unlikely to impose a harsh price cap. No announcement has yet been made, but the considered price cap is reportedly within a range between $65 and $75 per barrel (bbl) -- a level well above Russia's cost of production and current market price for its key crude benchmark Urals. For context, Urals is currently sold at a $25 discount to Brent crude, meaning Russian oil is offered around $60 per bbl on the global market. Russians were forced to offer steep discounts against Brent crude to sell oil even to their loyal customers in Asia amid a backlash for dealing with Russian President Vladimir Putin's regime.

The purpose of the price cap was to take advantage of G7 control of the world's maritime insurance, financing, and shipping services to starve Putin's regime of revenues to conduct the war in Ukraine. It's unclear how a price cap that exceeds the current market price could achieve this goal. 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.

Further weighing on the oil complex, U.S. gasoline and diesel fuel inventories increased by a combined 4.8 million bbl for the third week of November as demand for refined fuels softened. Gasoline supplied to the U.S. market, a measure of demand, fell last week by more than 400,000 barrels per day (bpd) to 8.327 million bpd after dropping another 269,000 bpd in the week prior. Distillate fuel consumption also decreased by 17,000 bpd to 3.846 million bpd.

Commercial crude oil inventories, meanwhile, declined by 3.7 million bbl to 431.7 million bbl, missing expectations for inventories to have fallen by 800,000 bbl. This comes after a sizable 5.4-million-bbl draw from domestic crude oil inventories reported for the second week of November. This large drawdown was realized as domestic refiners raised run rates by a full percentage point to 93.9% -- the highest utilization rate since the week-ended Sept. 17, processing 258,000 bpd more crude oil from the previous week. Earlier this week, analysts estimated a smaller 0.3% increase in the national refinery run rate.

U.S. crude oil production was unchanged from last week at 12.1 million bpd.

At settlement, West Texas Intermediate futures for January delivery dropped $3.01 to $77.94 per bbl, with January Brent futures on ICE falling $2.95 to $85.41 per bbl. December RBOB futures on NYMEX declined $0.0661 to $2.4744 per gallon, with December ULSD futures falling $0.1120 to $3.3593 per gallon.

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