Peace talks shear Oil price

Oil markets eye Ukraine talks. The USOIL slid from $107.50 to $100.75 into the NY open, with the move to near 2-week lows coming on reports that Russia/Ukraine peace talks in Turkey ended with a “constructive tone” according to Interfax. Whippy price action has continued, with the contract popping back to $103.80, since dropping under $100. Hopes of some progress supported market sentiment today, with Brent also moving down from session highs to currently $105.30, highlighting ongoing nervousness. Both assets revert more than 70% of last 2 weeks gains, indicating that next support levels could be seen on the 85.6% Fib level confluence of 50-day SMA, and March low at $92.20 for USOIL  and $97.00 for UKOIL.

Peace talks end with a “constructive tone,” according to various news headlines (albeit Russian press so far). They include Russia to cut military activity near Kyiv, citing IFX. A Putin-Zelenskiy meeting is also possible according to Tass and Ukrainian sources. Talks are now in a practical phase, according to IFX. This news is seeing equities extend gains and bonds lose ground.

Saudi Arabia and the United Arab Emirates meanwhile said the US must trust OPEC+ strategy, in response to intensifying calls on the group to up production. OPEC+ meets on Thursday to decide on output levels for May and so far members have signaled that there is no need to change the current strategy of increasing output by limited amount each month.

In the meantime, OPEC+ is still struggling to raise output. The UAE said yesterday that it is doing its best to raise capacity but stressed that while it is investing and raising capacity that doesn’t mean it will act unilaterally, or that it wants to leave OPEC. A temporary pause in hostilities by rebels in Yemen against Saudi Arabia also helped to bring prices down. But, even if there was more talk of the release of strategic reserves, the fact is that Europe in the short term will struggle to live without Russian oil.

That is even more true for gas of course. Russia last week announced that it will only accept payment for Russian natural gas exports in rubles. German economy minister Habeck said today that “all G-7 ministers agreed completely that this (would be) a one sided and clear breach of the existing contracts”. Putin’s move appeared designed to try and support the ruble, but some have also feared that it is a pre-cursor to a cut off in supplies, which so far have continued to flow. Asked by reporters whether Russia could cut natural gas supplies to European customers if they refuse to pay in rubles, a Kremlin spokesman said “we clearly aren’t going to supply gas for free”, adding that “in our situation, it is hardly possible and feasible to engage in charity for Europe”. Germany, one of the countries most reliant on Russian gas deliveries, has previously said that it is prepared for all scenarios, although clearly there will likely be a hard squeeze next winter, even with the prospect of additional deliveries from the US and others.

Meanwhile the impact of the rise in energy costs is already evident in confidence numbers as the manufacturing sector is hit hard. UK data meanwhile highlights the negative impact of escalating energy bills on consumer confidence and consumption trends and the longer term effect will not just be a spike in prices, but also reduced demand, especially if central banks accelerate policy normalization policies.

 

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Andria Pichidi

Market Analyst

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