DTN Oil

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and the front-month Brent contract on the Intercontinental Exchange ended the first trading day following Christmas mixed. Extreme weather conditions in parts of the United States over the holiday weekend disrupted both refinery output and transportation demand, while an initial rally following a decree by Russian President Vladmir Putin evaporated as details were promulgated.

Shortly after 11 a.m. EST, or 6 p.m. Moscow time, the Kremlin website posted an executive order signed by Putin that bans the sale of Russian oil and oil products to countries that participate in a G7 price cap mechanism.

Taking effect on Dec. 5, G7 countries and allies set a $60-per-barrel (bbl) cap on Russian seaborne crude oil exports, with price caps on seaborne Russian oil products exports to take effect Feb. 5, 2023. The price caps were engineered to keep oil from Russia, the world's third-largest producer, flowing, while reducing the revenue Moscow receives that can be used in its war with Ukraine.

"Russia bans the sale of oil and oil products to foreign companies and individuals if the contracts on these sales include the use of this mechanism directly or indirectly. The established ban applies to all stages of sales up to and including the final buyer," states the decree.

The executive order takes effect Feb. 1, 2023, for Russian seaborne crude exports and is in force until July 1, 2023.

"The ban on sales of Russian oil products, as established by the current Executive Order, is to be applied on the date determined by the Government of the Russian Federation but no earlier than the date of its entry into force," states the executive order. The decree says sales banned by the executive order "may be carried out under a special decision of the President of the Russian Federation."

In a policy brief released by Harvard Kennedy School's Belfer Center for Science and International Affairs and the Mossavar-Rahmani Center for Business and Government earlier this month, Catherine Wolfram, Simon Johnson, and Å?ukasz Rachel said a decision by Russia to not sell its oil to countries participating in the price cap mechanism is an "irrelevant threat," as G7 countries, the European Union and Australia have an embargo in place.

"[K]eeping oil off the market could drive up prices and may increase the revenue Russia earns on its remaining non-capped sales," according to the policy brief. However, a higher world oil price could prompt greater production from the Organization of the Petroleum Countries, offsetting lost Russian production.

"If Russia decides to cut production rather than selling under the price cap, this would involve shutting down Russian oil production and sealing up wells, which can be an expensive and risky proposition," explain the authors, while simultaneously reducing government revenues from oil sales.

On Friday, Dec. 23, Russian Deputy Prime Minister Alexander Novak said Russian oil production might decline by 5% to 7% in early 2023 in response to price caps, with Russia potentially cutting 500,000 to 700,000 barrels per day (bpd) of oil. Novak estimated Russian oil production in 2022 at 10.7 million bpd.

NYMEX February West Texas Intermediate futures and ICE February Brent rallied to three-week highs on their respective spot continuous charts following Moscow's directive at $81.18 per bbl and $85.60 per bbl, respectively, before frittering away the advance. By settlement, February WTI futures dipped $0.03 to $79.53 per bbl, and February Brent ended $0.41 higher at $84.33 per bbl. March Brent settled at a $0.35 premium to the February contract, which expires Thursday, Dec. 29.

Oil futures also eased from highs in light-volume trade as market participants looked to glean restart times for Gulf Coast refineries following shutdowns and run cuts caused by extremely cold weather just ahead of the Christmas weekend. No fewer than eight refineries were adversely affected by the extreme weather by Friday, taking as much as 1.5 million bpd of refining capacity -- 8% of total U.S. refining capacity -- offline.

However, the extreme weather also caused thousands of flight cancellations and snarled roadway traffic, especially near the Great Lakes.

NYMEX January ULSD futures settled up $0.0876 at $3.3537 per gallon, edging off a $3.4051 three-week high, with the February contract ending at a $0.0406 discount to January delivery at $3.3131 gallon. NYMEX January RBOB futures settled down $0.0234 at $2.3602 per gallon, reversing lower from a $2.4175 three-week high reached overnight, with the February contract ending at a modest 81-point premium to January delivery. January ULSD and RBOB futures expire on Friday, Dec. 30.

Brian Milne can be reached at brian.milne@dtn.com