Oil tumbles as demand worries and cap plan dominates early in the week

Oil opened the week with a slump on mounting speculation that global demand is weakening, and as investors weighed up a slew of details on an ambitious US-led plan to try to cap the price of Russian crude .

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(Bloomberg) – Oil opened the week with a fall on mounting speculation that global demand is weakening, and as investors weighed up a slew of details on an ambitious U.S.-led plan to try to cap the Russian crude price.

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West Texas Intermediate fell toward $85 a barrel after a volatile run last week when prices swung in a wide arc to end little changed. Consumption prospects are feared to deteriorate as global growth slows and China maintains its Covid-19 control strategy by curbing activity.

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In the United States on Friday evening, the Treasury issued rough compliance guidelines for the proposed cap on Russian oil, focusing on the documentation needed for the private sector to join the program, which is expected to come into effect from December then. that Europe is tightening sanctions on flows. Deputy Treasury Secretary Wally Adeyemo said Moscow would have no choice but to participate.

Crude has sunk nearly a third since June, losing all gains since Russia invaded Ukraine. The reversal came as central banks, including the Federal Reserve, tighten policy to stifle inflation. The US price cap plan, which is backed by the Group of Seven, aims to reduce Moscow’s revenue from oil sales, compressing the flow of funds used to fund the conflict.

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“Now it looks like potential demand weakness is taking center stage, in terms of recession fears and prolonged restrictions in China,” said Sean Lim, Malaysia-based oil and gas analyst at RHB Investment. Bank Bhd.

Over the weekend, Ukrainian forces continued their advance in the Kharkiv region, exploiting the collapse of Russian defences. Since it erupted in February, the war – and its inflationary fallout after the pandemic – has rattled markets, with sanctions hitting some flows even as Asia increased its buying.

In China, the world’s biggest oil importer, authorities have stepped up lockdowns and restrictions as a key Communist Party meeting looms. Among the places currently facing restrictions are Chengdu, the country’s sixth-largest city, parts of Guiyang and at least one university campus in the capital, Beijing. Nationwide, 1,138 new infections were reported on Saturday.

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Iran nuclear talks were also in the spotlight as the UK, France and Germany said over the weekend they had “serious doubts” about Tehran’s commitment to a new agreement. If a pact is struck, it could pave the way for a huge increase in the flow of Iranian crude to the global market.

The widely watched crude market time spreads have narrowed in recent weeks, signaling an easing of near-term tensions. Brent’s early spread — the difference between its two closest contracts — was $1.07 a barrel in forward, more than $1 lower than two weeks ago.

Last week, the Organization of the Petroleum Exporting Countries and its allies, including Russia, paired a token supply cut with a warning that the grouping was ready to act again if circumstances changed.

“The fact that OPEC is ready to respond to market changes is a positive for prices,” RHB’s Lim said. “It will provide basic support to the market.”

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