Oil rally continues after EU proposal to ban Russian crude

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.

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