Oil erased earlier gains as broader equity markets collapsed and risk-averse investors pared crude positions ahead of the end of the year.
West Texas Intermediate futures fell below $80 on Monday. Stronger-than-expected US economic data fueled speculation that the Fed would keep its policy tight to fight inflation, sending a guage of the US dollar higher. Earlier, WTI rose as much as 3.4% after China announced further easing of Covid restrictions in some of its largest cities. Monday also marked the beginning of a European Union and Group of Seven cap on Russia crude prices at $60 a barrel
The noise surrounding headlines is keeping traders from engaging in the market, said Rebecca Babin, a senior energy trader at CIBC Private Wealth Management. “Many have decided to tune out altogether. Volumes are light and positioning is decimated as it seems prudent to wait until 2023.”
Oil has swung inside of a $10 range in recent weeks as markets weigh restrictions on Russian supply and China’s gradual reopening against the risk of an economic slowdown in the US and other parts of the world struggling to contain inflation. Futures holdings continue to plunge as the year draws to a close -- open interest in the main oil contracts is the lowest since 2015 -- indicating that traders have pared back positions amid a number of risks, including the future of Russian supply.
The price-cap deal for Russian crude was months in the making as the US expressed concern that the EU’s bar on Russia’s oil and related insurance and financing services would lead to a damaging price spike. Still, the level now agreed upon is about $10 above Russia’s key Urals grade, suggesting its impact on those flows may be limited. In Asia, however, the ceiling is below the price for ESPO crude, which is loaded from Russia’s far east.
For now traders are waiting to judge the long-term impact of the sanctions, and if shipping and insurance restrictions will obstruct flows. Although some ships are stuck near Turkey in part due to the changes, there has been no widespread disruption.