Big Banks Liquidating Oil Funds, Russia Defaults on Debt

Fuel prices are mixed this morning, with crude oil prices trending higher while fuel prices move lower. Despite today’s uptick, the crude oil market has been shifting lower this month. Early in June, prices crept upwards to $122 per barrel; now, prices have been consistently below $110. Although fuel prices don’t always follow crude oil, it is an important factor in consumer fuel prices. Part of the decline is due to investors pulling out of the market after months of rallying.

Data from the CFTC (Commodity Futures Trading Commission, the federal agency that tracks and regulates commodity markets) shows that hedge funds and other large investors sold the equivalent of 71 million barrels of petroleum contracts last week, over 10% of the outstanding contracts in the marketplace. The sharp selloff is the largest since Russia’s Ukraine invasion, suggesting investors are spooked by impending recession warnings. Plenty of investors are still betting that oil prices will continue moving higher; from mid-May through mid-June, investors bought the equivalent of nearly 100 million barrels of oil.

On the international stage, Russia appears to have defaulted on its foreign debt for the first time in over one hundred years, suggesting that sanctions are working to harm their economy. Defaults can have a devastating effect on an economy: by increasing the cost of raising new funds, it forces the Russian government to cut spending, further restricting economic output.  The G7, a group of seven of the world’s largest democracies, is planning to implement additional sanctions and declare a cap on Russian oil prices, limiting the price countries can pay for Russian oil. A price cap would have the dual benefit of lowering energy prices and starving Russia of revenue if it can be enforced. Moreover, the US has announced plans to impose additional tariffs on Russian imports, further restricting cash flows to Russian companies.