Brent set for solid weekly gains as geopolitical concerns drive prices

Front-month ICE Brent has increased by $1.69/bbl on the day, to $96.66/bbl at 09.00 GMT. Brent futures have gained over 3% in the past week.

PHOTO: The G7 coalition has agreed to set a fixed price on Russian oil purchases, and will decide on more details of the price cap later this month, according to Reuters sources. Getty Images

Upward pressure:

The G7 coalition has decided to set a fixed price cap on Russian oil instead of a floating rate. “The coalition worried that a floating price pegged below the Brent international benchmark might enable Russian President Putin to game the mechanism by reducing supply,” Reuters reported citing unnamed sources. Putin has in the meantime refused to supply oil to nations that impose the price cap.

If Putin orders less oil production it could stifle supply in this tight market. The Saudi Arabia-based International Energy Forum (IEF) already expects a decline of 1-3 million b/d in Russian output as a result of EU sanctions coming into force.

The US Department of Energy has reported the sale of the last batch of crude from Strategic Petroleum Reserves. These reserves have fallen below 400 million bbls, and stand at 399.8 million bbls, the lowest level since May 1984.

In addition, US President Joe Biden has announced that the US is willing to release more from these emergency reserves in order to lower high crude prices, raising concerns about further depletion of the stocks.

Downward pressure:

The National Health Committee of China has stated that the nation must "absolutely not waver from the overall strategy aimed at preventing the virus from entering from abroad and regenerating from within," debunking rumours of the government-led lockdowns ending soon.

The decline in Chinese services activity in October coupled with persistent Covid-restrictions illustrates the weakness of China's demand recovery. The outlook for the Chinese economy has also dimmed as a result of this policy.

Global oil demand is expected to take a hit from an impending recession, according to a Reuters poll of economists and analysts.

There is little upside for Brent next year based on "dim prospects for the world economy and potential new COVID lockdowns in China," Frank Schallenberger, head of commodity research at LBBW.

By Konica Bhatt

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