(Bloomberg) -- Oil advanced after China made further progress toward reopening the economy and sanctions on Russia’s sea-borne crude exports took effect.
West Texas Intermediate futures rose toward $83 a barrel as China’s key urban centers including Shanghai announced further easing of Covid restrictions over the weekend. Monday also marked the beginning of a European Union and Group of Seven cap on Russia crude prices at $60 a barrel. The Kremlin said it is working on a response, and that it won’t recognize the rules.
For now traders are waiting to judge the long-term impact of the sanctions, and if shipping and insurance restrictions will obstruct flows. Although some ships are stuck near Turkey in part due to the changes, there has been no widespread disruption. Also impacting oil on Monday was the decision by The Organization of Petroleum Exporting Countries and its allies to maintain production at current levels, as the group paused to take stock of the global market.
Oil has stemmed a bout of weakness, buoyed in recent days by optimism about China’s reopening. Still, futures holdings have continued to plunge as the year draws to a close -- open interest in the main oil contracts is the lowest since 2015 -- indicating that traders have pared back positions amid a number of risks, including the future of Russian supply.
“It remains uncertain whether it will ensure the smooth flow of Russian barrels to Asian markets or if there will be a material disruption,” RBC Capital Markets analysts including Helima Croft said in a note, referring to the price cap and potential fallout. “Any clear indication that Russia is prepared to cut off oil exports could cause prices to spike in the coming days.”
The price-cap deal for Russian crude was months in the making as the US expressed concern that the EU’s bar on Russia’s oil and related insurance and financing services would lead to a damaging price spike. Still, the level now agreed upon 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 for ESPO crude, which is loaded from Russia’s far east.
“We are going to see a huge, huge boost to demand if and when China reopens, we are expecting it gradually from April onwards,” Amrita Sen, chief oil analyst at consultant Energy Aspects said in a Bloomberg TV interview. She expects “some volatility in the near term but then upward trajectory for oil prices should resume from next year.”