Last week’s action in oil prices turned out to be a rather muted affair with futures in M1 WTI, Brent and RBOB falling 1.5%, Gasoil improving by 2% and Heat only managing to scrape a positive return. Unfortunately, the low state of inventory and the narrative surrounding it, were in the main neutered by continued anxiety in how tariffs would play out. None more so than the unsettling standoff in what, or if, any levies and reciprocals look like between the United States and the European Union. US Commerce Secretary Howard Lutnick’s assurance over the weekend that a deal with the EU will be secured does not counter the recent letter sent by President Trump to Ursula von der Leyen in which it was stated an intent by the US to impose a 30% tariff. This may now have been toned down, but even at the purported 15% or higher baseline, it is more than the EU will tolerate. According to the Wall Street Journal, among many, The EU’s member states are preparing for new countermeasures against the US after being told President Trump wants more concessions for a trade agreement. The middle of the week served up a mixed bag in terms of actual oil stock data. Even though the EIA Inventory Report revealed a 3.9mb draw, the market was disappointed in the builds in Distillate and Gasoline levels. Having started to settle into how the summer season had turned up for Gasoline, indicated by increasing travel, a resounding rethink took place. Product supplied in the motor fuel, a proxy for demand, fell by 670kbpd which is why oil prices were unable to shake off the handcuffs of wider trade apprehensions.

The new price cap will not work

Whenever Europe acts in response to Russia's unjustifiable invasion of Ukraine three years ago, there is always an element of derisional 'at last'. To say the bloc's efforts in bringing any sort of financial penalty against Moscow as pedestrian is hardly over-critical. All the variances in sanctions and tariffs are frankly too boring to list, and the parochial needs of members have always been served while each sort out how they might wean themselves from an addict’s reliance on Russian energy. The original price cap of $60/barrel was introduced in 2022 by the G7 and while darts can be thrown at the speed of implementation from Europe, the so-called leader of the free world, the US President, now refuses to sign up.

It is unclear why the current US government fails to join in. Maybe Donald Trump still believes he will somehow pull a Vladimir Putin-shaped rabbit from the hat of peace. Or that with the current sensitivity in oil price inventory, it will not play out well with all the many sanctions and tariffs on the dark fleet infrastructure, in how when combined they will accelerate prices further.

Whatever the considerations may be, without the cooperation of the United States, the new price cap, which is a 15% sliding affair below $60, is almost guaranteed to be as ineffectual as its previous incarnations. The bill of intent, also taken up by the UK, is a targeting of oil supply and financial services. It does not take much of an economist or indeed any practitioner in financial markets to see the glaring issue that such intent involves the US Dollar. Obviously, there are alternative payments involved in Russian oil getting to customers, but it is still in the main, priced in the world's marker currency and so are the settlement and banking services of nearly all international finance. The EU may congratulate itself all it likes, even with the Slovakia Prime Minister, Robert Fico dropping his opposition to the latest package and allowing for a full majority approval as needed by EU mandate. But the US President has provided the Kremlin with a stay of hand after the 50-day ultimatum on ending its war on Ukraine and by doing so has already scuppered the new price cap. Well, at least until the 50-day can-kicking exercise is over.

Weaponizing oil in the current new mode of international relations can only show results if by some chance the US and its allies convince China to join in. The pinnacle of oil importing is hardly at present likely to throw its greatest source of international oil under the proverbial bus. In 2024, it imported 2.17mbpd from Russia and while such an amount could easily be replaced, the relationship of convenience does seem to suit both countries. Helping to secure Beijing and Russia’s newfound friendship is the tariff strain that they share. Indeed, Sergei Lavrov, the Russian foreign minister last week met with Xi Jinping. China’s President who expressed support for Russia, saying that relations between Beijing and Moscow had “deepened”, which was followed up by a missive from China’s foreign ministry, according to the Telegraph, saying it “firmly opposed all illegal unilateral sanctions” by the US and added, “there are no winners in a tariff war, and coercion and pressure will not solve problems.” Back-slapping good intent by the EU is one thing; ending a dug-in Russian expansion attitude that is served by contemporary diplomatic convenience and an isolationist United States is another. 

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