Oil prices drop on expectations of ceasefire in Ukraine unlocking Russian supply

Contracts settled about 1% higher on Wednesday as investors assessed oversupply risk and the prospect of a Russia-Ukraine peace deal

Oil prices fell on Thursday on expectations of a Ukraine Russia ceasefire which could pave the way for the unwinding of Western sanctions against Russian supply, though trading was set to remain thin due to the U.S. Thanksgiving holiday.

Brent crude futures shed 21 cents, or 0.3%, to $62.92 a barrel as of 0108 GMT, while U.S. West Texas Intermediate crude futures dropped 21 cents, or 0.4%, to $58.44 a barrel.

Both contracts settled about 1% higher on Wednesday as investors assessed oversupply risk and the prospect of a Russia-Ukraine peace deal.

U.S. envoy Steve Witkoff is set to travel to Moscow next week with other senior U.S. officials for talks with Russian leaders on a possible plan to end the nearly four-year-old war in Ukraine, the deadliest in Europe since World War Two.

Still, Russia will make no big concessions on a peace plan, a senior Russian diplomat said on Wednesday, after a leaked recording of a call involving Witkoff showed he had advised Moscow on how to pitch to U.S. President Donald Trump.

"Any ceasefire will reduce perceived supply risks tied to U.S. sanctions on Russian oil producers Rosneft and Lukoil," Commonwealth Bank of Australia analyst Vivek Dhar said in a client note, adding that the sanctions, which took effect on Nov. 21, have already impacted Russia's oil and refined product exports.

"A Ukraine Russia deal should see Brent fall to $60 a barrel relatively quickly," Dhar said, noting that a ceasefire would also allow Russian refinery activity to normalise as Ukraine's drone attacks would stop.

A larger-than-expected rise in U.S. crude inventories also weighed on the market.

U.S. crude inventories climbed 2.8 million barrels to 426.9 million barrels last week as imports rose to an 11-week high, the Energy Information Administration said on Wednesday. Analysts had expected a 55,000 barrel rise. [EIA/S]

U.S. energy firms cut the number of oil rigs by 12 to 407 this week, their lowest since September 2021, energy services firm Baker Hughes also said on Wednesday, a sign that the market is well-supplied.

The Organization of the Petroleum Exporting Countries and allies are likely to leave output levels unchanged at a meeting on Sunday, three OPEC+ sources told Reuters on Tuesday. Some members of the group, which pumps about half the world's oil, have been raising production since April to gain market share.

Offering some support to crude prices were rising expectations for a U.S. Federal Reserve interest rate cut in December. A lower rate typically stimulates economic growth and bolsters demand for oil.