Oil prices were set for a second consecutive weekly increase early on Friday, as the EU’s proposal to ban imports of all Russian crude and oil products by the end of the year trumped market concerns about slowing Chinese oil demand amid the harshest COVID restrictions since the initial wave of the pandemic.
Putting up in Asian trading overnight, WTI Crude was topping $110 per barrel and Brent Crude was over $113 a barrel (as of 7:50 a.m. EST), with both benchmarks pushed higher by several pieces of bullish news this week.
The European Commission on Wednesday officially proposed a full ban on Russian crude and oil product imports by the end of the year.
“Let us be clear: it will not be easy. Some Member States are strongly dependent on Russian oil. But we simply have to work on it. We now propose a ban on Russian oil. This will be a complete import ban on all Russian oil, seaborne and pipeline, crude and refined,” European Commission President Ursula von der Leyen said at the European Parliament.
Some EU members, most notably Hungary, are pushing against a full embargo on Russian oil, and talks among member states continue as they look to reach a consensus since the Commission’s proposal requires the approval of all 27 EU countries.
On Thursday, OPEC+ ended one of its shortest meetings on record with no changes to its production plan, aiming to boost crude oil production in June by 432,000 barrels per day (bpd), in a move widely expected by the market. While OPEC+ is sticking to its policy of modest monthly increases, many of its members are not pumping to their quotas and the group overall is estimated to be around 1.5 million bpd below its quota.
“Lagging production is unlikely to change anytime soon, particularly given the weaker demand for Russian oil, which will eventually lead to output decreasing,” ING strategists Warren Patterson and Wenyu Yao said on Friday, commenting on the OPEC+ meeting and expected production from the alliance going forward.
By Tsvetana Paraskova for Oilprice.com
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Still, the number of EU members opposing the proposed ban or demanding exemptions is increasing. There is a real possibility that Hungary or Slovakia might veto it.
The continued rise in oil prices also proves the short-sightedness and futility of the Biden Administration’s decision and the IEA’s to release a combined 240 million barrels from both the US SPR and the inventories of the OECD countries.
The released oil has hardly had any impact on crude oil prices. Moreover, it will have to be replaced eventually at higher crude prices than the ones prevailing at the time of the release particularly against a background of a possible EU banning Russian oil supplies with Brent crude hitting $140-$150 a barrel.
An EU ban will be catastrophic for the global economy particularly the United States and the EU whose economies will suffer most. On the other hand, Russia will be raking in cash as a result of steeply rising oil and gas prices.
Therefore, it is far cheaper for the EU to continue importing Russian crude at the current prices than to ban them and then tries to buy the same volumes at prices 27%-36% higher. And that depends on finding alternatives to Russian oil supplies. But there will be none.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London