Oil Falls on Signs of More Energy Legislation

Oil’s rally evaporated amid signals that Democrats are considering more energy legislation as they and the White House face increasing pressure to curb US energy costs and inflation. 

West Texas Intermediate erased all of its gains late in the session to settle below $119 a barrel. US President Biden has not ruled out an excess profit tax for oil companies, Bharat Ramamurti, deputy director of the National Economic Council, said in a Bloomberg Television interview. Democratic Senator Ron Wyden is planning to propose a surtax that would mean companies face as much as 42% federal taxes depending on their profit margin, according to people briefed on the proposal. 

“Energy traders are bracing for some type of action to come from the Biden administration to help Americans at the pump, even if it will have little long-term effect,” said Ed Moya, senior market analyst at Oanda. 

The news comes after Biden announced he will travel to Saudi Arabia next month and will discuss energy production, according to US National Security Counsel Coordinator John Kirby. The diplomacy efforts will come at a time of heightened risk to the global economy from decades-high inflation and record energy costs. Wall Street started the week on the back foot as traders price in steep increases in Federal Reserve interest rates.

Biden’s visit to Saudi Arabia comes after the US has repeatedly asked OPEC to pump more crude to help tame rising gasoline prices and the hottest inflation in decades. US retail gasoline recently hit a national average of $5 a gallon. Meanwhile, Russia’s war in Ukraine has made the crude and fuels markets even tighter, with the WTI benchmark soaring more than 60% this year. Several Wall Street banks are expecting further gains in the coming months. 

Prices:

• WTI for July delivery fell $2.00 to settle at $118.93 a barrel in New York.
• Brent for August settlement fell $1.10 to settle at $121.17 a barrel.

Some Asian buyers have been snapping up Middle Eastern oil earlier than usual in the physical market, in a sign of robust demand. The spot buying activity, which normally picks up pace after the release of official selling prices, started even before Iraq, Kuwait and Iran had made their announcements.

Yet demand risks still persist in the market as producer group OPEC said it sees oil demand growth halving next year. While crude has experienced a strong rebound, it could be derailed by inflationary pressures, virus outbreaks and the economic fallout from Russia’s war in Ukraine.