Oil tumbled as traders weighed the impact of rising trading costs on the major exchanges while President Joe Biden is set to address the Russia-Ukraine war in Europe.

Futures in New York fell 2.3% after a choppy session on Thursday. The White House and Europeon Union are close to a deal aimed at slashing the region’s dependence on Russian energy, although that may focus primarily on flows of natural gas. At the same time, Austria has said it won’t agree to an embargo of Russian oil and gas.

The market is also in the midst of a liquidity crunch, leaving prices vulnerable to big swings. Clearing houses have been increasing margins, effectively making it more expensive to trade the same amount of oil. On Thursday, ICE raised its margin requirement for Brent and gas oil futures by 19% after increasing Brent margins by 32% earlier this month. “Crude trading is choppy as we await further details from the Nato meeting today and see where Europe’s Red line will be to sanction Russian Energy,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “The headline risk remains exceptionally high with liquidity remaining low.”

Although many buyers are shunning Russian crude, especially former European purchasers, Asian users may be stepping in to take barrels at discounted rates. China’s refiners are discreetly purchasing cheap Russian oil, traders say, and India processors have also scooped up some of the volumes. Meanwhile, International Energy Agency members are seeking to reduce their use of Russian oil and gas radically, and the organization is ready to release more oil from emergency stockpiles if needed.

Oil has rallied more than 50% this year, hitting the highest level since 2008 earlier this month, as Russia’s invasion of Ukraine threw global commodity markets into turmoil. The U.S. and U.K. have already moved to bar flows of Russian crude. But there’s greater reluctance among EU members to follow suit given the region’s higher dependence. Trafigura Group forecast this week that crude prices are set to keep rising, potentially hitting $150 a barrel.

Loadings from a Black Sea oil export terminal partially resumed after completely halting Wednesday after storms damaged some of its facilities. Initial expectation were that exports could be cut 1 million barrels a day, further depriving the European market.

In Brussels on Thursday, Biden joined back-to-back summits with NATO, the Group of Seven and the EU where he called for removing Russia from the G-20. On Friday the U.S. president will visit Poland, which is hosting the biggest number of displaced Ukrainians.

As the war drags on, there’s a growing willingness on both sides to use Russian energy supplies as a weapon. On Wednesday, President Vladimir Putin ordered the nation’s central bank to develop a mechanism to force European customers to pay for Russian natural gas in rubles, spurring a rally in prices. In response, Germany and Italy said efforts to charge in rubles for gas would be a violation of their contracts

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One part of the solution would be to take advantage of the next price fall to give the U.S. a proper system of fuel taxation. That’s what Indian Prime Minister Narendra Modi did after crude’s 2014 slump, keeping pump prices fairly stable while taking in an increasing share of the retail cost as taxation. Such a move will be challenging in the U.S., where Congress must take politically difficult votes on tax rises. Legislating a one-time increase in rates before indexing the tax to inflation, however, would help insulate the issue from Washington’s veto.

Evidence from other countries suggests such a system won’t upset the voters if it’s introduced sensibly. Inflation causes discontent if it’s an ongoing problem, but incremental, one-time shifts in costs — especially if introduced against the backdrop of falling commodity prices — quickly become part of the cost of living, and end up compensated by reduced spending elsewhere. For all that American politicians fret when the price of gasoline has a four in front of it, their European peers have survived for decades with prices that never fall as low as even current record U.S. levels:

Transport fuel that’s properly priced needs to be combined with measures to reduce demand — first by increasing fuel economy standards to match those in other rich countries, and then by investing in public transport and greater urban density to give people an alternative to driving.

As an ever-increasing share of the car fleet switches to electric vehicles, those measures ultimately will need to be enhanced with levies on miles traveled and single-occupancy driving to account for the declining share of road power coming from fossil fuel. In the near term, though, the priority should be on increasing gasoline and diesel taxes (I Don’t Agree with Diesel Tax Increases/LRB) to a level where they start encouraging consumers to switch away from their current wasteful habits.

It’s paradoxical that America has ended up with such a harmful equilibrium around transport fuel. Politicians generally like to limit the number of issues that could blow up in their faces, but they’ve done precious little over the years to reduce the explosive potential of gas prices. When crude prices start falling again, as they inevitably will, Congress should gird itself for change. It’s time this bomb was finally defused.

Other states could follow by putting their own gas tax holidays in place.

Maryland lawmakers have suspended the state gas tax for 30 days, which will save drivers 36.1 cents per gallon on gas, or 36.85 cents per gallon on diesel fuel. The gas tax holiday could cost the state almost $100 million. Georgia’s suspension of its gas tax is slated to last through May 31. The state typically applies levies of 29.1 cents per gallon on gas, and 32.6 cents per gallon on diesel. “We saw the pain at the pump with the rapidly rising prices that everybody across the country was seeing, and we decided we wanted to take some urgent immediate action,” Maryland Gov. Larry Hogan, a Republican, told CNBC’s “Squawk Box” on Tuesday.

More than a dozen states are reportedly considering taking similar measures. There are proposals on Capitol Hill to suspend the federal gas tax, which is 18.4 cents per gallon. “I think that we’re going to have a bunch of states that temporarily suspend gas taxes in the coming weeks and months,” said Jared Walczak, vice president of state projects at the Tax Foundation.

A federal gas tax holiday is “certainly possible,” he said. Such moves would be unprecedented. There has never been a federal gas tax holiday, Walczak said. Moreover, any breaks on state gas taxes have mostly been limited to only a couple of days. The average state gas tax is about 39 cents per gallon, or about double the federal gas tax of 18.4 cents per gallon. If gas taxes are suspended either on the state or federal side, it would take time for drivers to rack up a substantial savings.

When asked about estimates that Maryland drivers would only save about $15 on average over the 30-day gas tax reprieve, Hogan told CNBC he thinks the holiday “makes a huge difference to the average consumer.” Estimates from the Penn Wharton Budget Model have found that a federal gas tax holiday through the end of the year would result in around only up $50 in savings for the average driver, based on current gas prices.  Gas tax holidays may not be the most efficient policies for other reasons. While part of the tax reduction will go to consumers, a substantial portion will benefit producers, Walczak said.

Moreover, if prices drop too precipitously, that could lead to shortages, he said. Most states currently have substantial budget surpluses, according to Walczak. That is due in part to the fact that as personal incomes have gone up amid the pandemic bolstered by federal policies, states have been able to collect more money through income and sales taxes.

The federal government, on the other hand, has been deficit spending through most of the pandemic. A federal gas tax holiday would leave the government “even more in the lurch,” Walczak said. or both states and the federal government, gas taxes finance road infrastructure. Severing those ties would make it more difficult to maintain them, he said.

While the Russia-Ukraine conflict has driven gas prices higher, they had already gone up $1.30 per gallon on average for the 16 months prior due to inflation, according to Walczak. A reprieve from federal or state gas taxes would only help drivers at a time when all consumers are facing record high prices. “This is targeted at one particular purchase when consumers are feeling the pinch everywhere,” Walczak said. “It’s an ill-targeted approach to broader inflation.”

In a note on Monday, Mizuho Bank said two factors were pushing oil prices higher: lingering Russia-Ukraine uncertainty as well as hopes that China’s latest Covid impact could be less dire than anticipated amid expectations of easing restrictions. The key hub of Shenzhen partially opened up Friday, as five districts were allowed to restart work and resume public transportation, Reuters reported.

Ukrainian and Russian officials have met intermittently for peace talks, which have so far failed to progress to key concessions. Still, Ukrainian President Volodymyr Zelenksyy has called for another round of talks with Moscow.

“If these attempts fail, that would mean that this is a third world war,” Zelenskyy told CNN’s Fareed Zakaria in an interview that aired Sunday morning.

“The breakdown of peace talks between Russia and Ukraine saw crude oil prices extend their rebound on Friday,” ANZ Research analysts Brian Martin and Daniel Hynes wrote in a Monday note. “However, it failed to offset the losses earlier in the week, with Brent crude ending down more than 4%.”

Meanwhile, tight supply continued to worry markets, sparking a call by the International Energy Agency (IEA) on Friday for “emergency measures” to reduce oil usage.

The Russia-Ukraine war has led to worries over supply disruptions as a result of U.S. sanctions on Russian oil and gas. The U.K. and European Union also said they would phase out Russian fossil fuels. Russia supplied 11% of global oil consumption and 17% of global gas consumption in 2021, and as much as 40% of Western European gas consumption in the same period, according to statistics from Goldman Sachs.

European Union governments are set to meet U.S. President Joe Biden this week as the EU considers an oil embargo on Russia over the unprovoked invasion of Ukraine.

The Commonwealth Bank of Australia warned Monday that oil prices have fallen below recent peaks because markets are still largely pricing oil by “assessing the likelihood of a diplomatic solution to the Ukraine conflict.”

“Physical shortages, linked to current sanctions on Russia, though will eventually play a more dominant role in oil price determination,” said Vivek Dhar, the bank’s director of energy commodities research, in a note.

“The industry’s apparent inability to fill any potential gap has seen calls for consumption to be reduced,” the ANZ Research analysts said.

OPEC+ in its latest report showed some producers are still falling short of their supply quotas, with Reuters citing sources who said that the alliance missed its targets by more than 1 million barrels a day.

In a 10-point plan, the IEA’s suggestions to reduce oil demand included reducing speed limits for vehicles, working from home for up to three days a week, and avoiding air travel for business.

“We estimate that the full implementation of these measures in advanced economies alone can cut oil demand by 2.7 million barrels a day within the next four months, relative to current levels,” the IEA said Friday.

Both West Texas Intermiediate crude, the U.S. oil benchmark, and global benchmark Brent crude settled below $100 per barrel Tuesday, a far cry from the more than $130 they fetched just over a week ago. WTI ended the day at $96.44, for a loss of 6.38%. During the session it traded as low as $93.53. Brent settled 6.54% lower at $99.91 per barrel, after trading as low as $97.44. WTI and Brent fell 5.78% and 5.12%, respectively, on Monday.

“Growth concerns from the Ukraine-Russia stagflation wave, and FOMC hike this week, and hopes that progress will be made in Ukraine-Russia negotiations” are weighing on prices, said Jeffrey Halley, senior market analyst at Oanda. “It seems like the old adage that the best cure for high prices, is high prices, is as strong as ever,” he added, noting that he believes the top is in for oil prices.

Crude surged above $100 per barrel for the first time in years the day Russia invaded Ukraine, and prices continued to climb as the conflict intensified. WTI hit a high of $130.50 a barrel early last week, while Brent traded as high as $139.26 per barrel. Prices jumped as traders feared that Russia’s energy exports would be disrupted. So far the U.S. and Canada have banned Russian energy imports, while the U.K. has said it will phase out imports from the country. But other nations in Europe, which are dependent on Russia’s oil and gas, have not enacted similar moves.

“It’s really a market that traded entirely on fear,” Rebecca Babin, senior energy trader at CIBC Private Wealth U.S., said of the initial spike higher amid supply fears. “Now, without a true change in the facts, we’re trading on the hope” that things won’t be as bad in the commodity market as initially feared. “We don’t have a lot of clarity around what is really going to happen with crude supplies in the future as a result of this conflict,” she added. While self-sanctioning has happened to a certain extent, experts say Russian energy is still finding buyers, including from India.

China’s latest moves to curb the spread of Covid-19 are also having an impact on prices. The nation is the world’s largest oil importer, so any slowdown in demand will hit prices.

A deal with Iran could also add new barrels of oil to the market. Russia’s Foreign Minister Sergey Lavrov is in favor of resuming the deal, according to Rueters. Oil has been especially volatile in recent sessions, whipsawing between gains and losses with every new geopolitical development. As Tamas Varga from brokerage PVM summarized: “Is it the mother of all corrections or the market is turning increasingly confident that a significant supply shock will be avoided?”

The surge in oil has pushed prices at the pump to record highs. The national average for a gallon of gas hit $4.331 on Friday, the highest ever, according to AAA. The number is not adjusted for inflation. Prices have eased slightly since. The average for a gallon of gas stood at $4.316 Tuesday.

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WTI futures crude, the U.S. oil benchmark, lost 8.75% to trade at $99.76 per barrel at the lows of the day. International benchmark Brent crude shed 8% to $103.68 per barrel. In afternoon trading some of the losses were recovered. WTI settled 5.78% lower at $103.01 per barrel, with Brent finishing the day at $106.90 per barrel, for a loss of 5.1%.

Rebecca Babin, senior energy trader at CIBC Private Wealth U.S., attributed the declines to a mix of geopolitical and demand factors. Russia and Ukraine were slated to resume peace talks on Monday, while China’s March demand is set to be revised lower due to new coronavirus lockdowns. Additionally, open interest in Brent futures has dropped, which means financial players are reducing risk. “Today’s action reflects a shift in sentiment in Russia/Ukraine causing sentiment traders to sell, fundamental concerns around demand coming from China’s Covid lockdowns causing fundamental traders to take profits, and technical pressure as crude breaks” key levels, said Babin.

Monday’s sell-off builds on last week’s decline, which saw WTI and Brent register their worst week since November.

Oil surged above $100 in late February as Russia invaded Ukraine, prompting fears that supply would be disrupted in what was already a tight market. It was the first time oil breached the triple-digit level since 2014. And the climb didn’t stop there. WTI traded as high as $130.50 last week, with Brent almost reaching $140. The market has been whipsawing between gains and losses in what’s been an especially volatile time for oil prices. The surge has sent the national average for a gallon of gas in the U.S. to the highest on record, unadjusted for inflation, which is adding to inflationary fears across the economy.

Even with Monday’s big decline both Brent and WTI are still up more than 30% for the year. “We have a demand scare for the first time in a while,” said John Kilduff, partner at Again Capital. “The Covid lockdown in China has spooked the market,” he added, noting that high fuel prices around the world is also causing demand destruction.

Prices violently whipsawed over the five-day period due to a flurry of news including a U.S. ban of Russian crude imports and the U.K.’s gradual phase out of them. Much of the industry is already shunning Russian oil. In the most recent demonstration of its pariah status, there were no buyers in a tender for crude from the country’s Far East. Nuclear talks came to a standstill, prolonging the absence of Iranian barrels in a market desperate for additional supplies. “Volatility is not going to disappear anytime soon,”said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC. You can see $10-$15 increases at the “blink of an eye” due to a tight market and geopolitical risks.

The fallout from the war has rippled through commodity markets from wheat to key fuels such as gasoline and diesel. Increasing inflationary pressure around the world are forcing banks to contemplate a phase of monetary tightening that might choke off the rebound. Rystad Energy AS has predicted Brent could soar to an eye-watering $240 a barrel this summer if countries continue to sanction Russian oil imports, while Goldman Sachs Group Inc. says that demand destruction is the only way to buffer high prices. “Extreme intraday volatility perhaps says something about several things: degree of uncertainty, the nature of the news flow, the spillover from some chaotic spot markets and the relatively low liquidity levels at some points,” said Paul Horsnell, head of commodities research at Standard Chartered Plc.

Mounting penalties against Russia have prompted fears that an already tight oil market may be stretched further, due to the absence of the country’s 5 million barrels of oil exports. However, OPEC has stressed there’s no shortage, continuing its output hike of 400,000 barrels a day.

Open interest in the main oil futures contracts has plunged to a six-year low in recent days as traders retreat from risk. Volatility has rocketed, and exchanges have boosted margins, effectively raising the cost of buying and selling. Brent traded as high as $139.13 a barrel this week, and as low as $105.60.

The United Arab Emirates on Wednesday called on OPEC+ to boost output faster, though the nation’s energy minister appeared to later temper that message. The cartel, which counts Russia as a key member, has so far resisted calls from consumers to pump more, arguing that the surge in prices is driven by geopolitical tensions rather than a supply shortage.

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