Crude Falls in Choppy Session as EU Considers Oil Sanctions

(Bloomberg) -- Oil slipped after a choppy session as the European Union debates whether to ban Russian crude imports with some key members remaining opposed.

Futures in New York closed down 0.3% after trading in a $5 range on Tuesday. EU foreign policy chief Josep Borrell said he expects leaders to discuss -- but probably not yet approve -- further sanctions against Russia when they meet in Brussels later this week. Meanwhile, TotalEnergies SE strengthened its commitment to shun Russian oil and refined products entirely by year-end, saying it will no longer sign or renew long-term contracts.

Crude has been hugely volatile after a spike to near $140 a barrel sapped liquidity from the market. That led to a sharp pullback, with intraday swings still frequently exceeding $5. There are signs that traders have been stepping back from the wild price gyrations by curbing their holdings of futures contracts. The chief executive officer of Vitol Group told a conference on Tuesday that the cost of trading energy markets is currently “enormous.”

Low liquidity is a “logical response to the increased volatility and margins and most importantly the uncertainty around political outcomes,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “Market participants have realized they have very little edge in calling political end games and don’t want to keep getting chopped up trying.”

Russian crude is still being treated with extreme caution by buyers worried about damage to their reputation or falling foul of sanctions. TotalEnergies is the latest major oil company to self-sanction the country’s energy exports. The firm previously said that it halted all purchases of Russian oil on the short-term market. 

The EU is now also considering targeting Russian oil, as the U.S. and Canada have, but there is a lack of consensus among the group. Germany is reliant on crude imports from the country and has so far rejected a proposed embargo. Hungary is also against it. EU leaders are set to meet Thursday, and any decision would need to be agreed by all 27 states.

“Some of the weakness we saw in oil in the last week and a half or so was related to the liquidation of long positions linked to increased margin calls,” Francisco Blanch, head of commodities research at Bank of America said in a Bloomberg Television interview. “Open interest has actually fallen in oil despite the incredible risk that we are running here with the war in Ukraine still unfolding.”

Speaking at the Financial Times Commodities Global Summit, the CEO of Gunvor Group said Russian refiners are now trimming their output as a bout of self-sanctioning pushes traders away from the country’s products. Consultant Energy Aspects Ltd. said at the same conference that some 500,000 tons of Russian diesel exports are at risk in March. 

The jump in oil is fanning already-elevated inflation in economies around the world, complicating the task for monetary policy makers including the U.S. Federal Reserve. Chair Jerome Powell said Monday that the U.S. central bank is prepared to raise interest rates by a half percentage-point at its next meeting if needed.

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