(Bloomberg) — Oil is heading for a third weekly loss as the European Union has imposed a higher-than-expected price cap on Russian crude and recession concerns threaten the demand outlook.
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Brent is trading below $86 a barrel, the global benchmark down more than 2% this week. European diplomats continue to discuss how strict the limit should be, highlighting disagreements between member states. Talks are likely to resume on Friday, but could slip after that.
Signs of demand challenges are piling up. In China, the world’s largest oil importer, daily Covid infections hit a record this week, prompting authorities to tighten curbs. The Institute of International Finance, meanwhile, predicts that next year the global economy will be as weak as it was in 2009 after the financial crisis, while the conflict in Ukraine continues.
Crude oil fell this month, reversing gains made in October after the Organization of the Petroleum Exporting Countries and allies agreed to cut production. In a sign of the group’s stance ahead of their meeting next month, Iraqi oil minister Hayan Abdul Ghani expressed support for the coalition and indicated he would coordinate with Saudi Arabia’s de facto leader.
“Crude has been battling bearish factors for the past few sessions over fears of a slowdown and rising Covid cases in China,” said Ravindra Rao, head of commodities research at Mumbai-based Kotak Securities Ltd. “A Russian oil price cap between $65 and $70 won’t have much of an impact,” because it’s already trading at those levels, he added.
Widely observed divergences point to a weak market, with WTI spreading early in the contango, a pattern pointing to short-term ample supply. The difference was 12 cents a barrel, compared to 80 cents in a bullish backwardation structure two weeks ago. Brent’s early spread has fallen to 10 cents a barrel in backwardation from $1.58 two weeks ago.
The price cap plan is part of a response by the EU and the Group of Seven to punish President Vladimir Putin for his invasion of Ukraine by cutting Moscow’s revenues while allowing other states to continue importing. Putin said that the imposition of limits by Western countries “with a high probability” would have a negative effect on the energy market.
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