Oil Retreats Near $104 With Focus on Ukraine-Russia Talks

Futures in New York fell about 5% to trade near $104 a barrel. The war in Ukraine has roiled commodity markets from crude to grains, leading to buyers shunning Russian oil as they navigate sanctions.

A further round of talks between Russian and Ukrainian officials on Monday will focus on discussing a potential ceasefire with an immediate withdrawal of troops and security guarantees, Ukraine negotiator Mykhailo Podolyak said, though he called it a “hard discussion.” Moscow at the weekend stepped up its bombardment of western areas close to the border with Poland. Senior American and Chinese officials were meeting as the U.S. seeks to enlist China to help end the invasion.

There are also some risks to demand. China placed 17.5 million people in Shenzhen under a lockdown for at least a week amid a surge in Covid-19 infections, and told people in Jilin province not to travel, the first time the country has sealed off an entire region since April 2020.

“Crude oil trades lower, but still within last week’s record wide trading range after Ukraine’s president said talks with Moscow show signs of becoming more substantive,” said Ole Hansen, head of commodities strategy at Saxo Bank. China’s latest lockdowns “should help cool prices given its potential impact on demand,” he added.

There’s a flurry of diplomatic efforts to try and stop the war. A top adviser to Ukraine’s President Volodymyr Zelenskiy said “continuous” discussions with Russia are under way by video, while Russian President Vladimir Putin engaged with his French and German counterparts after they talked with Zelenskiy. U.S. Secretary of State Antony Blinken also spoke with Ukraine’s foreign minister.

That heralds the start of a jampacked week that will test whether Russia plans to repay its international debt and will likely see the Federal Reserve raise interest rates for the first time since 2018, potentially strengthening the dollar. The virus resurgence in China is also causing some concerns about oil demand, while the Federal’s interest rate decision will come on Wednesday.

The prospect of extra oil supply from Iran quickly alleviating a tight market was dashed on Friday after Tehran and world powers suspended talks to restore a nuclear deal. Russia sought U.S. guarantees that sanctions imposed for its invasion wouldn’t affect its planned partnership with the OPEC producer. Iran carried out a missile strike in Iraq after the breakdown of negotiations.

Money has started to flow back into oil exchange-traded funds. The United States Oil Fund ETF, the largest in the oil market, posted its biggest weekly inflow since April 2020 last week. That’s in contrast to the early part of last week when one bearish fund saw a record inflow.

While Russia has been hit with tough sanctions and the U.S has banned imports of its crude, funds to the nation may not be completely choked off yet. India is said to be working out a mechanism to facilitate trade using local currencies, while supertankers were still being booked to load Russian oil off Denmark. At least some ships will be for cargoes that traded prior to the invasion.

“Oil markets in Asia have staged an unconvincing pullback today in hopes that Ukraine-Russia negotiations are moving to a constructive stage,” Jeffrey Halley, senior market analyst for Oanda Asia Pacific Pte., said in a note. “Despite Iran’s missile launches into Iraq over the weekend, it and the nuclear deal appear to be off the market’s radar for now.”