Crude oil prices remained bullish Tuesday morning after the latest signal from the European Union that it is preparing to impose an oil embargo on Russia. China Covid lockdowns continued to exert downward pressure on benchmarks, temporarily reversing the price rise, but the upside potential remains substantial, especially after BP’s CEO Bernard Looney told Reuters he expected the deficit of Russian oil to double from 1 million bpd to 2 million bpd this month.
Germany’s Economy Minister Robert Habeck said on Monday that Germany was ready to support an immediate oil embargo as well as a more gradual phase-out of Russian oil imports.
"Germany is not against an oil ban on Russia. Of course, it is a heavy load to bear but we would be ready to do that," Habeck said, as quoted by Reuters.
The official also admitted the EU will suffer consequences from its sanction action.
“It’s inconceivable that sanctions won’t have consequences for our own economy and for prices in our countries,” Habeck said, as quoted by the Financial Times. “We as Europeans are prepared to bear [the economic strain] in order to help Ukraine. But there’s no way this won’t come at a cost to us.”
Meanwhile, Brent crude topped $108 per barrel on Monday, retreating slightly on Tuesday morning to $106.7 (8:50am EST), but remaining substantially higher than a week ago. West Texas Intermediate was trading at $104.3 per barrel at the time of writing, after topping $105 on Monday.
Related: The Inevitable Decline Of Russia’s Oil Industry
In further bullish news, Reuters reported that five analysts it polled expected the American Petroleum Institute to report another decline in crude oil inventories, with the median forecast for a 1.2-million-barrel draw.
This would add to already substantial declines in crude oil and fuel inventories. In crude, inventories have shed a cumulative 421 million barrels since July last year. Whole fuel inventories across the board are palpably below the five-year average for this time of the year.
Meanwhile, the longer-term outlook for oil also remains bullish as Russia’s production is falling faster than expected and a lot of it may be lost irreversibly.
While this is happening, OPEC recorded almost no increase in production last month, with analysts expecting the cartel to report a modest 40,000-bpd monthly increase from March. This compares to some 250,000 bpd in monthly increases agreed by the OPEC+ members two years ago.
By Irina Slav for Oilprice.com
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Brent crude would head toward $130-$140 a barrel if an EU embargo on Russian oil and products exports estimated 4.2-5.6 (mbd) was agreed. Russia will be able to sell the bulk of its EU-embargoed oil exports to China, India, Turkey and many other customers even among Western oil traders. Moreover, it won’t lose financially since skyrocketing oil prices will offset any reduction in its oil exports while the EU and the US will pay through the nose, that is if they were able to find a replacement to Russian oil supplies. They won’t particularly with global oil inventories shedding 421 million barrels in less than ten months since 2021. This amounts to almost double the combined US SPR and IEA oil releases 240 million barrels.
If the EU is hoping OPEC+ will come to its rescue, then it is wasting its time.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London