Oil contracts rebound as Russia cuts output

Oil contracts rebounded on Friday after Russia announced it would slash its crude output in response to a Western price cap that was imposed on exports after Moscow’s invasion of Ukraine.

Brent, the international benchmark, and its US counterpart WTI, which had been down earlier in the day, jumped more than two per cent after Russian deputy prime minister Alexander Novak said production would be cut by 500,000 barrels per day, or five per cent of output, in March.

“Crude prices reacted positively to the news, considering that so far Russian oil production has been relatively resilient,” said UBS analyst Giovanni Staunovo.

“The move... aims to improve oil revenues by narrowing the discount of Russian oil to Brent.” An EU-wide ban on Russia oil products — like diesel, gasoline and jet fuel — came into effect Sunday alongside a Group of Seven (G7) price cap on the same items. That expanded on the EU embargo on seaborne oil deliveries introduced two months ago — when it also established with G7 partners a $60-dollar-per-barrel cap for Russian exports.

Oil, already bolstered by the reopening of top consumer China after lengthy pandemic restrictions, rebounded further on the news from Novak, who in charge of Moscow’s energy policy.

Russia is part of a 23-nation alliance with the Opec crude group that already agreed in October to reduce output by two million barrels per day until the end of this year.

Elsewhere, Wall Street extended losses at the opening bell, but both the Dow and S&P 500 finished higher, lifted in part by a surge in petroleum-linked shares like Chevron and oil services company Halliburton.

Briefing.com analyst Patrick O’Hare said investors are in “wait and see” mode ahead of next week’s consumer price index report, which will influence the outlook for future Fed interest rate hikes.

Having spent January optimistic that the days of central bank tightening would soon come to an end, traders have been brought back down to earth this month as they contemplate borrowing costs going higher and staying there longer than previously expected.

Bucking the downward stock markets trend, Tokyo rose Friday on a weaker yen, though the currency rallied after the market closed on reports that the Japanese government would nominate Kazuo Ueda to replace Haruhiko Kuroda as head of the country’s central bank.

Ueda is an economist and former member of the Band of Japan policy board. But analysts said the yen’s advance may be more to do with the fact deputy governor Masayoshi Amamiya would not take the post, which would have likely seen a continuation of the current dovish approach. “While unexpected and a potentially hawkish development it probably doesn’t change that much from a monetary policy point of view in the short term,” said Hewson.

Ukraine’s debt rating: Moody’s said on Friday it has downgraded Ukraine’s debt rating over a protracted war with Russia, but shifted its outlook from negative to stable.

The ratings agency cut the grade a notch to Ca from Caa3, a rating that suggests a near-default state -- close to a year since Russia’s invasion.

The downgrade is “driven by the effects of the war with Russia that are likely to pose long-lasting challenges to Ukraine’s economy and public finances,” said Moody’s Investors Service in a statement.

“These challenges increase risks to government debt sustainability, making a debt restructuring with significant losses for private-sector creditors very likely,” it added.

According to Moody’s estimates, the country’s GDP contracted by around 30 percent last year following Moscow’s invasion.

Despite financial support from donors for repairs and reconstruction, the war will likely cause lasting damage to the productive capacity of key economic sectors, Moody’s added.

But it also said that although there is uncertainty around timing and form, “a debt restructuring has become highly likely in light of the sustained economic disruption and the large fiscal costs of the war,” in providing justification for the stable outlook.

International Monetary Fund staff will meet with Ukrainian officials in Warsaw next week, a source familiar with the plans said on Friday, as Ukraine presses for a multi-billion dollar borrowing program to cover its funding needs given Russia’s war.