Oil prices seesaw, but Chinese demand worries linger

NEW YORK: Oil prices seesawed on Friday in thin market liquidity, closing a week marked by worries about Chinese demand and haggling over a Western price cap on Russian oil.

Brent crude futures dropped 17 cents to trade at $85.17 a barrel by 11:25 a.m. EST (1625 GMT), having retraced some earlier gains.

U.S. West Texas Intermediate (WTI) crude futures were down 3 cents at $77.91 a barrel. There was no WTI settlement on Thursday due to the U.S. Thanksgiving holiday and trading volumes remained low.

"Because there's light volume after the holiday, we're giving up some of the gains here a bit," said Phil Flynn, an analyst at Price Futures group.

Both contracts were headed for their third consecutive weekly declines after hitting 10-month lows this week. Brent was set to end the week down 2.6 percent, while WTI was on track to fall 2.5 percent.

Brent and WTI's market structure implies current demand is softening, with backwardation, defined by front-month prices trading above contracts for later delivery, having weakened markedly in recent sessions For the two-month spread, Brent's structure even dipped into contango this week, implying oversupply with near-term delivery contracts priced below later deliveries.

China, the world's top oil importer, on Friday reported a new daily record for Covid-19 infections, as cities across the country continued to enforce mobility measures and other curbs to control outbreaks.

This is starting to hit fuel demand, with traffic drifting down and implied oil demand around 1 million barrels per day lower than average, an ANZ note showed. Meanwhile, G7 and European Union diplomats have been discussing a Russian oil price cap between $65 and $70 a barrel, but an agreement has still not been reached ahead of talks expected to resume on Friday.

The aim is to limit revenue to fund Moscow's military offensive in Ukraine without disrupting global oil markets, but the proposed level is broadly in line with what Asian buyers are already paying.

Oil and gas exports are forecast to account for 42 percent of Russia's revenues this year at 11.7 trillion roubles ($196 billion), according to the country's finance ministry, up from 36 percent or 9.1 trillion roubles ($152 billion) in 2021.

The G7, including the United States, as well as the whole of the European Union and Australia, are planning to implement the price cap on sea-borne exports of Russian oil on Dec. 5. India has emerged as the second-largest single buyer after China of Russian oil since the conflict began in February. Indian refiners have taken the place of refiners in countries that have imposed sanctions on Russian crude imports, or have steered clear of Russian crude to avoid negative publicity.

Some Indian refiners are paying the equivalent to a discount of around $25 to $35 a barrel to international benchmark Brent crude for Russian Urals crude, two sources said. Urals is Russia's main export crude. The U.S. Treasury guidance published on Tuesday said the cap will be placed on what are known as Free on Board (FOB) prices, which do not include the cost of insurance and shipping. That would be the price that the crude would be sold at if a buyer went and picked it up from a Russian terminal.

Trading is expected to remain cautious ahead of an agreement on the price cap, and ahead of the next meeting of the Organization of the Petroleum Exporting Countries and allies on Dec. 4.