Oil rally continues after EU proposal to ban Russian crude

Prices also reacting ahead of Thursday’s Opec+ meeting, where member countries are not expected to contribute much to easing supply constraints

A tanker at a fuel depot with heating oil in Germany. An EU ban on Russian oil imports could lead to a further rally in crude prices. AFP
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Oil prices continued their ascent on Thursday as the EU moves towards a gradual phase-out of oil imports from Russia by the end of this year, intensifying its sanctions on Mosco.

Brent, the global benchmark for two thirds of the world’s oil, was up 0.80 per cent to $111 per barrel at 11am UAE time on Thursday. West Texas Intermediate, the gauge that tracks US crude, was trading 0.61 per cent higher at $108.50 a barrel.

The world’s largest trading bloc plans to ban Russian oil over the next six months and refined fuels by the end of the year, but the proposal is yet to be officially approved by the EU Parliament.

“The oil market has not fully priced in the potential of an EU oil embargo, so higher crude prices are to be expected in the summer months if it’s voted into law,” Bjornar Tonhaugen, head of oil markets research at Rystad Energy, said.

“However, the long-term market reaction may be relatively muted, especially if the final embargo law is less severe and wide-ranging than the initial proposal due to the EU’s unanimity rules.”

Oil prices have been extremely volatile this year, affected by the conflict in Ukraine and concerns about demand in China as well as tighter US crude inventories. The EU aims to agree on the next round of sanctions by the end of the week or by May 9.

“Increased market volatility is to be expected,” Rystad forecasts.

After a period of lower oil prices, due to Covid-19-related demand downside in China and the mega-Strategic Petroleum Reserve release by the US and the International Energy Agency (IEA) in early April, higher prices could be around the corner, the Oslo-based consultancy said.

The oil market is also reacting ahead of the Opec+ meeting on Thursday. The super group of 23 producers is not expected to contribute much to easing the supply constraints.

“Opec+ will probably stick to their plan for modest production increases for June, particularly as strict Covid controls in China threaten the oil demand narrative for the rest of the year,” Emirates NBD said in a note on Thursday.

The European decision to ban Russian oil imports, however, “is not Opec’s problem”, according to Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Opec countries will stick to their plan to increase the daily output by around 430,000 barrels per day. On the other hand, the Opec countries haven’t been able to meet the daily quotas over the past couple of months, so it doesn’t really make sense to have quotas in place if the producer countries fall repeatedly behind their target,” she said, adding that the Opec decision will only play a “minor role” in energy prices.

“It also looks like the oil rally will likely remain capped below the $120/$130 [a barrel] area, as above this price range, the slowing demand could also slow the rally,” Ms Ozkardeskaya said.

Meanwhile, Europe is the destination for nearly half of Russia’s crude exports, according to the IEA. In 2021, the bloc imported 155 billion cubic metres of natural gas from Russia, which accounted for about 45 per cent of EU gas imports and close to 40 per cent of its total gas consumption, the agency said.

The feasibility of Europe eliminating its entire 1.5 million bpd of oil product imports to zero by the end of 2022 should be viewed with scepticism, according to Rystad.

“The ongoing diesel and gasoline shortages through the reduction in crude throughput in Europe and the potential ban on Russian products will lead to very tight road fuel markets into the summer. Prices may spike further unless demand pre-emptively drops dramatically, such as through an economic recession or lockdowns saw at the height of the pandemic,” said Mr Tonhaugen.

Despite such heavy reliance, some countries, such as Germany and Austria, have shown willingness to wean themselves off their dependence on Russian oil. Hungary and Slovakia, which received respectively 96 per cent and 58 per cent of their crude and oil products from Russia last year, according to the IEA, said they will not adhere to an oil embargo by the EU.

“Member states with limited options for replacing Russian oil supply in the short-term, such as Hungary and Slovakia, are allegedly getting an extra year to cut their imports,” Mr Tonhaugen said.

“Businesses will have time to react due to the proposed slow phase-in of the prohibition,” said Naeem Aslam, chief market analyst at Avatrade.

“Oil is a globally traded commodity that can be supplied far and quickly. This makes redistributing output quite simple — the void created by Russia will be rather easy to fill.”

Updated: May 05, 2022, 9:45 AM