(Bloomberg) — Oil advanced as China made further progress toward reopening, OPEC+ kept output steady and sanctions on Russian crude kicked in.
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West Texas Intermediate rose to $81 a barrel, building on a nearly 5% gain last week, as key urban centers including Shanghai announced further easing of Covid restrictions over the weekend. The Organization of the Petroleum Exporting Countries and allies including Russia agreed to keep output at current levels on Sunday, pausing to take stock of the global market.
To further punish Moscow for its incursion into Ukraine, the European Union, in tandem with the Group of Seven, agreed to impose a $60-a-barrel cap on Russian crude while banning most seaborne imports from Monday. The initiative aims to punish Russia financially while keeping that nation’s oil flowing to other countries. Russian Deputy Prime Minister Alexander Novak again rejected the cap, saying the country was ready to cut production if necessary.
Oil’s gain is the latest reversal in a year that has been extremely volatile for the world’s most important commodity, with markets rattled by Europe’s biggest land conflict since World War II and an aggressive round of central bank tightening to combat with rampant inflation. After hitting their lowest level since December early last week, benchmark US prices have since recovered.
“It remains uncertain whether the plan will ensure the smooth flow of Russian barrels to Asian markets or whether there will be a material disruption,” RBC Capital Markets analysts including Helima Croft said in a note, referring to the price cap and potential implications. “Any clear indication that Russia is ready to halt oil exports could send prices soaring in the coming days.”
Oil traders have been fixated in recent weeks on China’s rapidly changing approach to dealing with Covid-19. After a rare round of protests, authorities moved to ease restrictions, helping the outlook for demand for energy as well as other commodities. Major cities including Shanghai, Shenzhen and Guangzhou have eased restrictions in recent days, accelerating the move to reopen.
The OPEC+ agreement came after an online meeting that replaced what was originally supposed to be an in-person meeting at the group’s headquarters in Vienna. The joint ministerial monitoring committee overseeing the implementation of the production cuts will meet again on February 1, according to delegates. Most analysts expected no change in supply policy during the weekend session.
The deal to cap Russian crude prices was months in the making as the US expressed concern that an EU ban on Russian oil and related insurance and financial services would lead to a damaging spike in prices. Still, the now-agreed level 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 of ESPO crude, which is loaded from the Russian Far East.
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