Oil fluctuates as Putin warns of consequences to price cap amid demand concerns

Oil prices fluctuated on Wednesday as demand concerns continued to rise despite supply constraints after President Vladimir Putin said Russia would not supply oil and fuel if price caps on the country's exports are carried out as planned by the Group of Seven countries.

Brent, the benchmark for two thirds of the world's oil, was trading 4.75 per cent lower at $88.42 per barrel at 10.21pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down more than 5 per cent, at $82.37 a barrel.

Oil prices had plunged to their lowest point since January in early trading on Wednesday. The slide came as the US dollar rallied to record levels and demand concerns grew after China, the world's biggest energy importer, imposed strict movement restrictions to contain a resurgence in Covid-19 infections.

Prices recovered after Mr Putin's remarks on Wednesday led to concerns about a supply constraint in the market, although they reversed their gains later in the day.

Capping prices is “another stupidity, another non-market decision that has no prospects,” Mr Putin said at the seventh annual Eastern Economic Forum in Vladivostok, according to the state-run Tass news agency.

Russia “will fulfil the contracts, but will not supply oil, gas, or coal to its own detriment”, Mr Putin said.

On Friday, G7 countries said they would press ahead towards introducing a price cap on Russian oil imports, to crimp Moscow's ability to fund its military offensive in Ukraine.

“Russia is coping with the economic, financial and technological aggression of the West”, Mr Putin said adding, “I’m talking about aggression, there's no other word for it”.

“The idea of an oil price cap seems difficult to implement, first to find enough willing participants and second to effectively govern its mechanisms given the loss of influence,” said Norbert Rucker, head economics at Julius Baer.

“In the end, the West and the petro-nations face similar challenges in terms of how to use their powers but without moving prices too much.”

Oil had rallied on Monday after a decision by Opec and its allies to cut production by 100,000 barrels per day for the month of October amid an anticipated global economic slowdown owing to the pandemic and rising inflation in developed economies.

Concerns over China's economy then changed the course of markets.

Europe's face-off with Russia over the Ukraine war has exacerbated the continent's energy crisis and reverberated across markets.

Russia indefinitely suspended natural gas flows through the Nord Stream 1 pipeline into Europe, piling more pressure on the continent’s energy supplies and deepening the recession risks in the EU.

In addition to gas, Europe also imports crude oil from Russia. EU countries are phasing out these purchases, with an embargo set to take effect in December, in tandem with G7 attempts at implementing the price cap on Russian crude.

Meanwhile, the US dollar, in which international oil is priced, also hit a record high on Wednesday against major currencies, amplifying inflationary pressures and putting more pressure on the euro, sterling, the yen and yuan.

“A stronger dollar and China’s drag on demand, thanks to its restrictive Covid policies, are putting hard brakes on oil prices,” said Emirates NBD economists Khatija Haque, Edward Bell and Daniel Richards.

On Wednesday, economic data showed that China’s exports to western developed markets had weakened, with goods to US falling 3.8 per cent in August from a year earlier, the first contraction since May 2020.

Chinese exports to Europe grew about 11 per cent but the increase was less than half the rate in the previous month.

The latest economic data out of China, and news that it is implementing lockdowns and movement restrictions affecting 65 million people, sent oil prices to their lowest since the start of this year. China is the world’s second-largest economy.

On Thursday, markets will be watching the European Central Bank closely to see if it will increase interest rates and by a larger amount than its 50 basis points move in July, which was its first rate increase in 11 years.

Higher energy prices, the war in Ukraine and the fallout with Russia pushed inflation in the euro area to a record 9.1 per cent in August, from 8.9 per cent in July.

“Even ultra-hawkish rhetoric emanating out of the ECB tomorrow isn’t likely to be much of a saving grace for the beleaguered euro,” said Han Tan, chief market analyst at Exinity Group.

“Despite the 65 per cent chance currently priced for a 75 bps hike by the ECB on Thursday, markets may see beyond such a supersized move as just front-loading of its intended rate hikes. The ECB’s policy tightening plans may ultimately be curtailed by the depressing outlook for the eurozone.”

The single currency, which has been trading below or near parity since August 22, was trading at $0.9917 against the dollar at 12.36pm UAE time. The currency is down more than 12 per cent since the start of the year against the greenback and fell on Monday below 99 cents to the dollar for the first time in two decades.

“Should the ECB instead surprise markets with a relatively dovish 50 bps hike tomorrow, that might even open the floor below 0.98,” Mr Tan said.

The US Federal Reserve is also expected to increase rates when it meets from September 20 to September 21 to quell 40-year high inflation. The Fed raised interest rates by 75 basis points in its past two meetings.

Higher energy prices and soaring inflation have exacerbated fears of a recession and prompted the World Bank and International Monetary Fund to cut their growth projections for this year.

The downside pressure on US oil prices “is explained by the growing fear of recession”, said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Clearing the $85 support should pave the way towards the $80 mark, which is the post-pandemic up trending channel base. Below that level, Opec will certainly show up and say they are cutting output to further stabilise the market,” she said.

Still, on Monday following Opec's decision to roll back its output, Swiss bank UBS maintained its bullish outlook that Brent would rebound to $125 a barrel in the coming months amid supply constraints.