Oil has now lost all of its gains since the Russian invasion of Ukraine. WTI posted a weekly loss of $6.19 to finish at $86.87/Bbl as the market weighed the G7 price cap announcement on Russian oil exports, developments in the Iran-U.S. nuclear talks, and renewed Chinese Covid lockdowns.
The G7 nations agreed today to set a price cap on Russian oil exports – a move the U.S. hopes will both lessen pressure on the energy market and also cut overall Russian crude revenue. The group’s finance ministers said the cap would come into effect before early December. An actual price for the cap strategy has not yet been announced. Russia’s potential response is also a mystery, although they have threatened to withhold oil. They say they will find alternative markets with those nations that work on market terms.
We believe the price-cap policy would likely lead to reshaped trade flows or a decrease in Russian supply. Either of these would act as a neutral (at minimum) or bullish factor for crude prices. It is difficult to see a bearish outcome of such a policy unless you compare it to the price consequences of an outright ban on Russian crude.
In other supply-side news, the U.S. and Iran are still at an impasse over the renegotiated JCPOA nuclear agreement. Iran has responded to the final draft of the nuclear deal to the Biden administration; The White House countered by saying that Tehran's response was "not constructive" at all, raising questions about whether the two sides can come to terms. If an agreement is reached and the sanctions on Iran’s oil exports are relaxed, the nation could increase output by nearly 1 MMBbl/d. That would ease the pressure on a tight global market that Russia's invasion of Ukraine has rattled. But Iran’s insistence on U.S.’s guarantees that a new agreement would be permanent, and the back-and-forth nature of this deal makes it unclear when or if the sanctions on Iranian barrels be lifted.
Meanwhile, China's official manufacturing PMI data released on Wednesday showed that factory activity shrank in August amid the recent Covid outbreak. One of China's most populous and economically important cities, Chengdu, has been placed under lockdown, restricting its 21 million residents. China's "zero Covid" policy continues to weigh on the market amid anticipation of weaker fuel demand.
The expanded OPEC+ group meets on Monday. The market will be closely watching any developments in the Iran-nuclear deal and a possibility of an OPEC+ production cut. All considered we believe there is an upside to prices in the short term and in the forward curve. We still recommend costless collars for most clients. A collar would allow for a price floor to be set to protect against a price decline and also allow for upside participation if prices realize higher than the forward curve. They do have opportunity costs if prices move substantially higher, so talk with us about how to construct a collar that fits your financial goals.