Investors Ignore Storage Data As Crude Tanks on Russian Oil Price Cap Talks

Crude oil futures cratered in the middle of the holiday-shortened trading week. Despite the significant drawdown in domestic supplies, the January contract took a beating on talks surrounding caps on Russian crude prices. But will this move turn out to be bullish for energy commodities?

January West Texas Intermediate (WTI) crude oil futures plummeted $3.29, or 4.06%, to $77.72 per barrel at 19:15 GMT on Wednesday on the New York Mercantile Exchange. US crude is on track for a sharp 9% weekly loss, paring its year-to-date gain to below 3%.

Brent, the international benchmark for oil prices, slipped below $85. February Brent crude futures fell $0.33, or 0.39%, to $84.81 a barrel on London’s ICE Futures exchange. Brent is also poised to record an 8% weekly loss, although it remains up 9% on the year.

According to the US Energy Information Administration (EIA), domestic inventories of crude oil dropped 3.691 million barrels for the week ending November 18, higher than the market forecast of 1.055 million barrels.

Gasoline inventories rose 3.058 million barrels, heating oil stocks jumped 961,000 barrels, and distillate supplies climbed 1.718 million barrels.

But investors’ focus was entirely on a report in The Wall Street Journal that reported the US and its allies could agree on a price cap for Russian oil. The cap could be set between $60 and $70 per barrel.

Despite officials championing the proposal earlier this year, it could result in various consequences.

First, Russian production costs are only around $20 a barrel, so selling its energy would still be profitable.

Second, Moscow has stated that it would not do business with any country that partners with the G7’s policy. This might result in Russia building its reserves and removing supply from the markets, weighing on supplies that are already fragile.

Third, demand has increased significantly amid colder weather in North America and Europe, so this would also add to supply woes.

“The problem with price caps is they never work,” wrote Phil Flynn, an energy analyst and author of The Energy Report. “The other issue is that the price that they are setting is already higher than where Russian crude oil normally trades. This price cap is coming at a time when global supplies are below average and a perfect example of why this will not work. Let’s assume we get a very cold winter and prices spike and the price caps go into effect. What if Russia should decide to stop selling oil. Then global inventories will draw down dramatically and will cause a shortage of diesel. Factories will have to shut down, people won’t be able to afford to heat their homes…and the list goes on.”

In other energy commodities, January natural gas futures surged $0.337, or 4.55%, to $7.743 per million British thermal units (Btu). January gasoline futures tanked $0.1590, or 6.26%, to $2.3815 a gallon. January heating oil futures tumbled $0.1013, or 3.01%, to $3.2653 per gallon.

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