The prices of the two major oil benchmarks are bullish in the London trading session today as a result of the European Union’s proposal for new sanctions against Russia, including an embargo on crude in six months, which offset concerns over Chinese demand.
The global benchmark, the Brent crude futures is bullish by 0.98%, currently trading $111.22 a barrel while the United States (U.S.) benchmark, the West Texas Intermediate crude futures is bullish by 0.59%, currently trading $108.45 a barrel, as of the time of this writing. Both benchmarks jumped more than $1 a barrel earlier in the volatile session after gaining more than $5 a barrel on Wednesday.
The sanctions proposal, which was announced by European Commission President Ursula von der Leyen, still needs unanimous backing by the 27 EU countries to take effect. The sanction proposal includes phasing out supplies of Russian crude in six months and refined products by the end of 2022.
What you should know
- The proposal also mentions a ban on all shipping, brokerage, insurance and financing services offered by EU companies for the transportation of Russian oil, exactly one month from now.
- Although many welcome the proposed sanctions on social media, however, the EU faces the task of finding alternative supplies at a time when energy prices have surged.
- The EU imports about 3.5 million barrels of Russian oil and oil products daily and also depends on Moscow’s gas supplies.
- A handful of eastern EU countries are concerned that the proposal gives them insufficient time to adapt. On this, Helima Croft, RBC Capital Market’s head of global commodity strategy, said in a note, “The most immediate questions are how many countries will receive exemptions, the scope of the additional sanctions measures to curtail Russian oil exports to other key markets and President Putin’s response to the European action.”
- She further stated, “We think the price response to such measures will depend on how far they go in making Russia’s 4.8 million bpd (barrels per day) of global exports unavailable as opposed to unpopular.”
- The Organization of Petroleum Exporting Countries and its allies, the oil cartel better known as the OPEC+, is expected to agree to raise production targets by 432,000 barrels per day (bpd) for June, four OPEC+ delegates told Reuters.
- OPEC+ Secretary-General Mohammad Barkindo reiterated that it was not possible for other producers to replace Russian supply but expressed concerns about slowing demand for transportation fuels and petrochemicals in the world’s top importer, China, because of COVID-19 lockdowns.
- China is still battling COVID-19 infections as the rate of infection keeps increasing. A private-sector survey on Thursday showed China’s services sector activity contracted at the second-steepest rate on record in April.
- The decline is as a result of China’s pandemic measures, which aims for the country to have zero COVID-19 infections before lockdown measures can be lifted.
- In Iran, surging oil prices have given its energy-reliant economy a breather and hence its clerical rulers are in no rush to revive a 2015 nuclear pact with world powers to ease sanctions, three officials familiar with Tehran’s thinking said.
- In the United States, crude stocks were up 1.2 million barrels last week after more oil was released from strategic reserves, according to the Energy Information Administration (EIA).
The OPEC+ meeting is expected to hold later today and traders can expect a significant amount of volatility hitting the oil market, especially since the United States Federal Reserve concluded on increasing rates yesterday, which surprisingly brought about a weak dollar index. The weaker dollar index, the measure of the strength of the U.S. dollar would suggest that the interest rate hike has already been priced in.
On the EU sanctions, CBA analyst Vivek Dhar said in a note, “That’s a likely game-changer for oil and refined product markets,” adding that sanctions on insurance, previously used by the United States and European countries, were effective in limiting Iran’s oil exports.
