Oil declines as traders weigh G-7 crude ban, Saudi price cuts

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Oil declined as the week’s trading kicked off as investors weighed a pledge by the Group of Seven to ban imports of Russian crude against a cut in official prices by Saudi Arabia and China’s lockdowns.

West Texas Intermediate fell toward $109 a barrel after closing at a six-week high on Friday. The leaders of the most-industrialized countries made the vow in response to President Vladimir Putin’s war in Ukraine after holding a video call with Ukraine President Volodymyr Zelenskiy on Sunday. A similar plan by the European Union has yet to be agreed as some members object.

Saudi Arabia cut prices for buyers in Asia as coronavirus lockdowns in China weigh on consumption in the top importer. State-controlled Saudi Aramco lowered prices for the first time in four months, dropping its key Arab Light grade for next month’s flows to $4.40 a barrel above the benchmark it uses.

Crude has had a tempestuous year as Russia’s invasion of its smaller neighbor upended global commodity markets, lifting prices. The U.S. and the U.K. have already moved to ban imports of Russian fuel in response to the assault, but the weekend pledge by the G-7 will increase the pressure on Moscow further. Raw material prices have also been buffeted as leading central banks including the U.S. Federal Reserve tighten policy to quell a powerful surge in inflation.

The G-7 leaders will “commit to phase out our dependency on Russian energy, including by phasing out or banning the import of Russian oil,” they said. “We will ensure that we do so in a timely and orderly fashion, and in ways that provide time for the world to secure alternative supplies.”

The plan by the EU to follow suit with its own ban on Russian crude remains under discussion amid objections from Hungary. A meeting of the bloc’s 27 ambassadors ended on Sunday without an agreement, with talks expected to resume in the coming days. A ban on shipping Russian oil to third countries may also be delayed until G-7 countries commit to similar measures.

China’s repeated attempts to halt Covid-19 outbreaks with the lockdown of urban centers including the key hub of Shanghai have curbed energy consumption. Highlighting the economic damage, Premier Li Keqiang warned at the weekend of a “complicated and grave” employment situation.

Still, oil markets remain in backwardation, a bullish pattern marked by near-term prices commanding a premium to those further out. The spread between Brent’s two nearest December contracts was holding well above $13 a barrel, close to the level seen in the initial weeks after Russia began its invasion.