Oil drops as ‘open interest’ in commodity declines, analysts say

Following a sharp pullback last week as crude prices approached $140 per barrel, oil fell again on Tuesday, apparently due to the European Unionthe indecision whether or not to ban imports of crude Russia due to its invasion of Ukraine.

West Texas Intermediate for April delivery, which expired later Tuesday, fell 36 cents settle at $111.76 per barrel, and the more active May contract fell 70 cents settle at $109.27 per barrel; Brent for May settlement dropped 14 cents settle at $115.48 per barrel.

This happened in the wake of Germany reiterating its rejection of the proposed Russian embargo, joining Hungary in opposition; EU leaders are expected to discuss the issue further on Thursday, and any decision will need to be approved by all 27 states.

Julien LeeCommodity analysts for Bloomberg, pointed out on Tuesday that “large parts of Germany would come to a standstill” if the flow of oil from Russia was halted.

He said, “When I was a neighbor Poland is weaning itself off crude from the Kremlin, Europe’s industrial powerhouse remains so dependent that it would find it hard to support the Russian fuel supply ban being debated within the European Union this week.”

If a Russian embargo were approved, or if Russia itself were to cut off flows, “the markets served by these refineries would find themselves dependent on securing the scarce volumes of refined products from elsewhere, and dependent on a delivery expensive by truck and by rail… the Czech Republic and Slovakiabut especially for Germany, the cost of sanctioning Russian oil would be prohibitive,” according to Lee.

Yet European refiners are increasingly using most of their own oil in the wake of the Russian-Ukrainian war: Bloomberg on Tuesday cited the example of Norwayreporting that more than half of the crude transported from Norway Mongstad terminal so far this month (mainly the Johan Sverdrup grade), has been shipped to three normally regular buyers of Russian oil: Poland, Lithuaniaand Finland.

All of this is of course being played out against an unchanging backdrop of global market tension, and on Tuesday analysts told the media that prices could easily rise to $120$150 per barrel in the near future, especially in light of the refusal of the Organization of the Petroleum Exporting Countries (OPEC) to increase production and we shale limited in its ability to fully pump.

With regard to the commercial behavior of oil, Francois Blanchhead of raw materials research at Bank of Americanoted that while some of the weakness in oil last week was related to the liquidation of long positions related to increased margin calls, this week “open interest actually fell for oil despite the incredible risk that we’re running here with the war in Ukraine still going on.”

Rebecca Babinsenior energy trader at CIBC Private Wealth Managementadded that “market participants have realized they have very little benefit from calling political endgames and don’t want to keep getting cut trying.”

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