Oil stumbled as traders assessed a higher-than-expected price cap on Russian crude between $65 and $70 a barrel and a surprising build in US products.

The European Union’s proposed range would be well above Russia’s cost of production and higher than some countries have been paying for its oil. As Russia is already selling its crude at discounts of $20 a barrel in recent months, a high cap may have minimal impact on trading, keeping the nation’s supplies flowing into the global market.

West Texas Intermediate traded around $77 a barrel as investors digested rising US product stockpiles, accelerating a selloff in thin trading. Gasoline stockpiles rose by 3 million barrels, the largest build since July, with demand plunging by the most in nearly two months heading into the Thanksgiving holiday.  

“The effectiveness of price caps as a mechanism to tighten the screws on Russia remains a big question for the market,” said Michael Tran, an analyst at RBC Capital Markets. “What such policy measures does do is raise the degree of positioning paralysis for oil traders that are already grappling with an anti-risk taking period of low liquidity.”

Russia has previously said that it won’t sell crude to nations that use the cap, which is designed to punish Moscow for its invasion of Ukraine while keeping the nation’s oil flowing. 

EU ambassadors are meeting on Wednesday with the aim of approving the cap mechanism and a proposed price level. On Tuesday, the EU already watered down its latest sanctions proposal by delaying its full implementation and softening key shipping provisions.

Crude prices have suffered several sharp downturns in recent days. Demand in China, the world’s largest importer, remains weak as the country presses on with Covid-Zero curbs. Beijing asked residents not to leave the city unless necessary, to stem the spread of the virus.

As the oil market has softened in recent days, both Brent and WTI have at times traded in a bearish contango structure for the first time in months. WTI’s nearest timespread flipped back into contango once again. 

Eoin Treacy's view

The EU disputing what they are willing to pay for Russian oil seems to be an example of rebellion of a wish to tell the world how reality should be versus the unconvertible reality. The wish is to pay only $70 but how is that going to be enforced?

The most serious threat is the removal of insurance. The question is going to remain whether that increases the potential for an accident. The Baltic Dirty Index continues to accelerate higher.

Brent Crude oil continues to retreat from the psychological $90 area.