Oil prices crash as G7 consider Russian oil price cap

Oil prices crashed on Wednesday, with WTI prices dropping to $77.5 per barrel. If the WTI price declines, it may encounter support near $76.5 per barrel, while resistance can be found at $90.3 per barrel and further up at $93.4 per barrel. 

G7 leaders discussed the Russian oil price cap on Wednesday. G7 nations reportedly considered a price cap on Russian oil in the range of $65 - $70, which is above the current market level. Such a price cap would not hinder the trading of Russian oil, making this sanction against Russia a little more than a gesture. The continuation of the Russian oil trade would potentially prevent a supply shortage, driving oil prices down.

US crude oil inventories on Wednesday fell below forecasts, dropping by 3.7M barrels this past week, against expectations of a 2.6M barrel drop. The decline in oil inventories, however, failed to support oil prices.

Unsubstantiated rumors that OPEC planned an oil hike, caused oil prices to plummet early on Monday. OPEC+ members were reportedly considering an increase of up to half a million barrels a day for January. Saudi Arabian officials denied the news, however, causing oil prices to recover quickly. On Tuesday, other OPEC producers, such as the United Arab Emirates and Kuwait, re-affirmed the organization’s commitment to oil production cuts. OPEC+ members hinted that the organization will likely maintain production cuts through 2023, boosting oil prices.

This week reports that China has increased Covid measures, fuelled global recession concerns pushing oil prices down. Chinese authorities had to lock down Guangzhou’s largest center, while schools in Beijing closed. On Tuesday, Covid measures were also tightened in Shanghai. The country continues to grapple with rising Covid cases, with heavy restrictions impacting economic output. Beijing and other major Chinese cities have reported record coronavirus cases, dashing expectations of ending lockdowns. Health authorities in China seem committed to keeping strict lockdowns and quarantines in place for the time being. The uncertainty over oil demand in China has influenced oil prices considerably as China is the world’s largest energy importer and zero-Covid restrictions severely limit oil demand. 

October’s US inflation print came below expectations, bringing the dollar down last week. Cooling US inflation has reduced Fed rate hike odds, diminishing global recession concerns. Market expectations of future rate hikes were considerably trimmed after the CPI inflation report the week before and were further diminished after Tuesday’s PPI inflation print. Aggressive rate hikes stifle economic activity, undercutting oil demand and putting pressure on oil prices. 

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Written by:
Myrsini Giannouli

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