Oil climbs as China loosens curbs and OPEC+ keeps output steady

Oil advanced after China made further progress toward reopening, OPEC+ kept output steady, and sanctions on Russian crude kicked in.

West Texas Intermediate futures rose toward $82 a barrel as China’s key urban centers including Shanghai announced further easing of Covid restrictions over the weekend. The Organization of Petroleum Exporting Countries and its allies on Sunday agreed to maintain production at current levels, pausing to take stock of the global market.

To further punish Moscow for the invasion of Ukraine, the European Union, in tandem with the Group of Seven, agreed to cap Russia crude prices at $60 a barrel, while banning most seaborne imports from Monday. While penalizing Russia, the price level is meant to encourage continued Russian oil exports. The Kremlin said it is working on a response, and that it won’t recognize the rules.

Oil has stemmed a bout of weakness in recent sessions with markets turning optimistic about China’s reopening. Still, futures holdings have continued 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.

“It remains uncertain whether it will ensure the smooth flow of Russian barrels to Asian markets or if there will be a material disruption,” RBC Capital Markets analysts including Helima Croft said in a note, referring to the price cap and potential fallout. “Any clear indication that Russia is prepared to cut off oil exports could cause prices to spike in the coming days.”

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.

Prices:
  • WTI for January delivery added 2.2% to $81.73 a barrel at 10:19 a.m. in London.
  • Brent for February rose 2.1% to $87.36 a barrel.

“We are going to see a huge, huge boost to demand if and when China reopens, we are expecting it gradually from April onwards,” Amrita Sen, chief oil analyst at consultant Energy Aspects said in a Bloomberg TV interview. She expects “some volatility in the near term but then upward trajectory for oil prices should resume from next year.” – BLOOMBERG