EU closes in on $60 cap for Russian oil; pound rallies despite recession fears – business live

Stephen Innes, managing partner at SPI Asset Management

The European Union tentatively agreed, subject to Poland, to set the price cap on Russian crude oil at $60 per barrel, an EU diplomat told Reuters on Thursday. Since the price cap is lower than what has previously been bandied around, it raises the spectre of some form of Russian supply retaliation which should lend support for oil prices.

However, oil prices retreated off the highs as the weaker US dollar-inspired oil rally gave way to reasons why the dollar is weakening. Specifically, weaker US economic data tempered the rally as the remarkably resilient US jobs market showed signs of cooling. Indeed, the one glaring problem the oil market faces is the anticipated run of weaker US economic data, which is the price to pay for aggressively fighting inflation.

Still, the incremental steps to living with Covid in China should continue to put more lofty floors under prices.

Victoria Scholar, head of investment at interactive investor

“The European Union reportedly has cautiously agreed to a $60 price cap on Russian oil with plans to adjust the cap so that it remains at 5% below the oil price. The next step is for the proposals to be approved by all EU governments.

This week oil has been staging gains amid optimism towards the potential loosening of covid restrictions in China and the opening up of its economy at last, which could potentially unleash demand for crude oil from the world’s second largest economy.

Meanwhile oil prices are trading modestly lower ahead of the OPEC+ meeting on Sunday. Analysts are divided on what the cartel will decide to do on 4th December. At its October meeting, OPEC+ cut its daily oil production by 2 million barrels per day to try to boost prices. A recent media report that the cartel was considering hiking production was quickly refuted by Saudi Arabia. Given this week’s rally, perhaps the cartel will hold off from doing anything at all until China’s demand trajectory becomes clearer.

After a surge in oil prices in the first quarter following Russia’s invasion of Ukraine, Brent crude has been slowly pushing lower since March. However, this week has finally brought about some more bullishness.”

The European Union is edging closer to setting a $60-per-barrel price cap on Russian oil — a highly anticipated and complex political and economic maneuver designed to keep Russia’s supplies flowing into global markets while clamping down on President Vladimir Putin’s ability to fund his war in Ukraine — reports Associated Press.

AP explains:

EU nations sought to push the cap across the finish line after Poland held out to get as low a figure as possible, diplomats said Thursday. “Still waiting for white smoke from Warsaw,” said an EU diplomat, who spoke on condition of anonymity because the talks were still ongoing.

The latest offer, confirmed by 3 EU diplomats, comes ahead of a deadline to set the price for discounted oil by Monday, when a European embargo on seaborne Russian crude and a ban on shipping insurance for those supplies take effect. The diplomats also spoke on condition of anonymity because the legal process was still not completed.

The European Union is closing in on a deal to cap the price of Russian crude oil at $60 a barrel, as leaders try to clinch an agreement before Monday’s deadline.

EU governments tentatively agreed on Thursday on a $60 a barrel price cap on Russian seaborne oil – an idea of the Group of Seven (G7) nations – with an adjustment mechanism to keep the cap at 5% below the market price, according to diplomats and a document seen by Reuters.

Reuters explains:

The agreement still needs approval from all EU governments in a written procedure by Friday. Poland, which had pushed for the cap to be as low as possible, had as of Thursday evening not confirmed if it would support the deal, an EU diplomat said.

EU countries have wrangled for days over the details of the price cap, which aims to slash Russia’s income from selling oil, while preventing a spike in global oil prices after an EU embargo on Russian crude takes effect on Dec. 5.

It will allow countries to continue importing Russian crude oil using Western insurance and maritime services as long as they do not pay more per barrel than the agreed limit.

Europe will begin enforcing an embargo on Russian crude shipments from Monday, so the price cap would apply to oil exported by sea by Moscow to ports around the world.

As we reported yesterday, there had been fraught negotiations over where to set the cap. Estonia came under pressure to abandon its threat to veto the cap, which it feared would be set too high to hurt the Russian war machine.

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The pound has hit its highest level since late June, despite concerns about the UK economy, and political instability in Westminster.

Sterling hit $1.23 against the US dollar on Thursday, having bounced back from its record low of around $1.03 set two months ago.

During November, the pound climbed from $1.1469 to around $1.23, as international investors took an improved view of the UK economy after chancellor Jeremy Hunt ripped up the mini-budget.

The other side of the coin, though, is that the dollar has weakened as traders anticipate a slowdown in US interest rate hikes:

James Athey, investment director at abrdn, explains:

“Sterling has been one of the biggest beneficiaries of the market’s latest attempt to price an immaculate pivot from the Fed – growth and inflation soft enough to allow an easier Fed, but not so soft that it’s evidence of real economic stress. This has seen yields coming down and the Greenback giving back some of the significant gains for the year. Risk assets have reacted with typical, if ill-advised, gusto and so risk facing currencies like pound sterling have rallied strongly.

“Of course, domestic factors have played a part, as a semblance of institutional credibility has returned to the shores of Blighty via a renewed conservatism among the Conservative Party and finally a long-overdue 75bp hike from the Bank of England.

But…. Athey warns that the pound could weaken against the US dollar, as the economic outlook deteriorates:

The reality is that a recession is coming, and a Fed rescue is coming less quickly than in recent years. We see that reality as a coming cold shower for buoyant risk markets and as ever we expect the dollar to benefit from the resultant flight to quality.

With the UK economic outlook being even worse, this portends an unhappy combination for sterling.

The pound is still weaker than before the pandemic began (when it traded at $1.30), and before the 2016 EU referendum (when it was worth around $1.50).

Also coming up today

It’s Non-Farm Payroll day, when investors around the world learn how America’s jobs market fared last month.

Economists predict that job creation slowed in November, as rising interest rates cooled the labor market. The NFP is expected to have risen by around 200,000, down from 261,000 in October.

A weak payroll report could spur the US Federal Reserve to slow its interest rate rises, as Matthew Weller of Forex.com explains:

Friday brings the final jobs report before the FOMC’s highly-anticipated December meeting, where the central bank will decide between a fifth consecutive 75bps rate hike and a slight slowdown to a 50bps rate hike.

According to the CME’s FedWatch tool, traders are currently pricing in a 1-in-3 chance of another 75bps rate hike, with an implied two-thirds probability of a downshift to 50bps. That said, a particularly strong or weak jobs report, especially if confirmed by the inflation data (PPI and CPI) in the first half of December, could still prompt the Fed to change its path, so expect some market volatility around the release regardless.

The agenda

• 7am GMT: German trade balance for October

• 10am GMT: Eurozone PPI index of producer price inflation for October

• 11am GMT: Ireland’s Q3 GDP report

• 1.30pm GMT: US Non-Farm Payroll jobs report