Oil extends losses as major benchmarks fall below $110

Oil prices shed as much as $4 a barrel at the start of the trading session for the week, extending last week’s decline as diplomatic efforts to end the war in Ukraine were stepped up and markets braced for higher U.S. rates.

The global benchmark, the Brent crude futures is down 2.7%, currently trading $109.62 a barrel while the United States’ benchmark, the West Texas Intermediate (WTI) crude futures is down 2.8% currently trading $106.23 a barrel, as of the time of this writing.

Both contracts have surged since Russia announced its special military operation into Ukraine on February 24, which marked the beginning of Russia’s invasion of Ukraine. Both benchmarks are up roughly 40% Year-to-Date (YtD).

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Russia and Ukraine gave their most upbeat assessments after weekend negotiations, suggesting there could be positive results within days.

On Sunday, U.S. Deputy Secretary of State Wendy Sherman stated that Russia was showing signs it might be willing to have substantive negotiations over Ukraine, even as Moscow was intent on “destroying” its neighbour while Ukrainian negotiator, Mykhailo Podolyak said that Russia was “beginning to talk constructively.” Russia’s invasion, which it calls a “special operation,” has caused increased volatility in the energy market, which many have compared to the volatility seen in the cryptocurrency market.

Tina Teng, an analyst at CMC Markets explained that “Oil prices might continue moderating this week as investors have been digesting the impact of sanctions on Russia, along with parties showing signs of negotiation towards ceasing fire.”

She further stated, “As markets had priced in for a much tighter supply from February to early March, the focus is shifting to the monetary policy in the upcoming FOMC meeting this week, which could strengthen the USD further, and pressuring on commodity prices.”

The U.S. Federal Open Market Committee meets on March 15-16 to decide whether or not to raise interest rates. U.S. consumer prices surged in February, leading to its largest annual increase in inflation in 40 years, and is set to accelerate even further as Russia’s war against Ukraine drives up the costs of crude oil and other commodities.

Many expect that the U.S. Federal Reserve starts raising rates this week, which would put downward pressure on oil prices. Oil prices typically move inversely to the U.S. dollar, however, a stronger greenback makes commodities more expensive for foreign currency holders.

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Brent has already lost 4.8% last week and U.S. WTI fell 5.7%, both posting their steepest weekly decline since November 2021. That was after both contracts hit their highest levels since 2008 earlier in the week on supply concerns after the United States and European allies considered banning Russian oil imports.

The U.S. later announced a ban on Russian oil imports and Britain said it would phase them out by year-end. Russia is the world’s top exporter of crude and oil products combined, shipping around 7 million barrels per day or 7% of global supplies.

Warren Patterson, head of commodity research at ING stated, “The Russia-Ukraine situation is very fluid and the market is going to be sensitive to developments on this front. Suggestions that parties may be willing to negotiate is likely weighing on prices somewhat.

“In addition, growing COVID cases in China will raise concerns over demand. China is seeing its worst COVID outbreak in more than two years. The city of Shenzhen has gone into lockdown, whilst other cities are also seeing tougher restrictions.”

China, the world’s largest crude oil importer and second-largest consumer after the United States is seeing a surge in COVID-19 cases, with daily new caseload figures hitting two-year highs. It last reported 1,437 new confirmed coronavirus cases on March 13.