Oil fell amid signals that Iran nuclear talks may resume, paving the way for more oil supply to come into the market while intensifying lockdowns in China introduced risks to global demand. 

Futures in New York declined for a second session and closed below US$97 a barrel while Brent settled below US$100. In a tumultuous session, oil’s rally dissipated after Russian Foreign Minister Sergei Lavrov said that sanctions on his country won’t affect the Iranian nuclear deal, sparking optimism that the agreement could be revived. However, the market clawed back some of its losses after Russian President Vladimir Putin cast doubt on the success of negotiations between Russia and Ukraine.  

Oil has shed more than 20 per cent over the past week, slipping into a bear market after some of the most tumultuous trading ever experienced. With quick-paced geopolitical headlines buffeting the market, wild price fluctuations drove volatility to historic levels.

“This is a market that is trading on two strong emotions-- hope and fear,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “Neither of those things are going to change supply/ demand imbalances.”

Oil prices soared earlier this month after Russia invaded Ukraine in part due to fears that the loss of Russian flows may stretch an already tight market. The rise in prices, along with other commodities exported by Russia, has also fanned inflation fears as governments try to encourage growth after the pandemic. Consumers are already feeling the pain at the pump, with prices of transport fuels rising across the globe.

While there are still concerns that the disruption to Russian oil flows is squeezing an already tight market, OPEC has been quick to point out there is no shortage. In it’s monthly report, the cartel took an unusual step in acknowledging that the war threatens to intensify the surge in global inflation. U.K. Prime Minister Boris Johnson is expected to travel to the United Arab Emirates and Saudi Arabia this week in a push for more oil. The key cartel members have been resisting pressure from the U.S., Japan and European nations to accelerate production increases. 

The market is also in the midst of a liquidity crunch, leaving prices vulnerable to big swings. Clearing houses have been increasing margins -- effectively making it more expensive to trade the same amount of oil -- and open interest has collapsed to the lowest since 2015. The gap between bids and offers for WTI was six cents at times on Tuesday -- it would usually only be about half that amount -- another sign of a less active market.

While buyers continue to shun Russian crude, there are signs that exports might not be completely cut off as some deals retreat from the public eye. Surgutneftegas PJSC is offering financing flexibility to some customers in order to keep crude flowing, while India is working out a mechanism to facilitate trade using local currencies. Still, the value of Russia’s Urals crude keeps moving lower. 

Prices:

• West Texas Intermediate for April delivery fell US$6.57 to settle at US$96.44 a barrel in New York
• Brent for May settlement slid US$6.99 to settle at US$99.91 a barrel.

Putin told European Council President Charles Michel that Ukraine “is not showing a serious attitude toward finding mutually acceptable solutions” in talks with Moscow on ending the fighting, the Kremlin said. U.S. President Joe Biden will travel to Brussels next week to meet with NATO allies as Russia presses on with its invasion of Ukraine.

Meanwhile, China’s latest virus outbreak, with growing clusters spawned in some of its most-developed cities and economic zones, poses an unprecedented challenge for the country’s COVID Zero strategy. The nation injected more funds into the financial system and set a weaker-than-expected reference rate for the yuan, seeking to support the economy.