By Geoffrey Smith
Investing.com -- Crude oil prices drifted lower Thursday but remained at historically high levels, as a round of summit meetings in Brussels failed to generate any immediate signs of a tightening of the Western sanctions on Russia.
Analysts believe that up to 4 milllion barrels of oil a day of output capacity could be locked in, without a practical route to market, if the EU were to join the U.S. and U.K. in banning the purchase of Russian oil. However, such a move appears unlikely given resistance from Germany and others, who fear tipping their economies into a recession. EU leaders are set to discuss fresh measures at a meeting later that will also be attended by U.S. President Joe Biden. OPEC, whose members have generally avoided criticism of Russia's invasion, warned in a statement that it was concerned about the consequences of a more stringent boycott of Russian oil.
By 11:40 AM ET (1540 GMT), U.S. crude prices were down 1.7% at $112.94 a barrel, while Brent futures were down 2.0% at $119.23 a barrel. They are still up for the week, not least because of Russia's closure of the Caspian Pipeline Consortium's Tengiz-Novorossiysk link, which takes oil from Kazakhstan to the Black Sea. Russian authorities claim that storm damage forced them to shut down the CPC's export terminal at Novorossiysk.
U.S. Gasoline RBOB Futures, meanwhile, were down 2.2% at $3.3629 a gallon.
Prices have been supported this week by repeated signs that Western governments are willing to cut taxes on fuel in order to sustain demand at a time when prices at the pump have reached record highs (albeit in inflation-adjusted terms, prices are still generally well below their peak just before the Great Financial Crisis 14 years ago). Germany, Europe's largest economy, became the latest to do so on Thursday, announcing a cut of 30 euro cents a liter (the equivalent of $1.50 a gallon) in the duty levied on gasoline, and 14c a liter in diesel duty. The cuts are due to stay in place for three months. In addition, Berlin also announced temporary incentives to switch to public transport and a blanket 300 euro annual tax credit to cushion the impact of soaring energy bills.
Germany's measures follow similar ones by France, Italy, the U.K. and others. States including Maryland and Georgia have also suspended their gasoline sales tax while other state legislatures are considering similar steps.
The overall impact of those tax cuts is to sustain demand that was swiftly rebounding as the economic curbs caused by the pandemic were loosened across Europe and North America. U.S. inventory data showed a drop of nearly 3 million barrels in gasoline stockpiles last week, a sign that the Ukraine invasion has hardly had an impact on U.S. consumer or business confidence yet.
One of the factors keeping the market so tight (commercial stocks in the OECD were at an eight-year low at the end of February) is that U.S. producers have so far refused to increase output, preferring instead to use the windfall from higher prices to retire debt and stock. The Dallas Federal Reserve's latest business survey showed that over 40% of local oil executives thought an oil price of between $80 and $100 was necessary to justify investment in raising output, while another 20% thought prices needed to stay over $100 a barrel. The Dallas Fed's survey showed that companies can cover their operating costs in the Permian and Eagle Ford shale basins at anywhere between $23 and $35 a barrel.
U.S. output fell to 11.6 million barrels a day at the end of December, according to the government's most recent Short-Term Energy Outlook. The government expects production will only average 12 million b/d this year before hitting a new high next year.