Crude Oil Rally Stalls as EU Divided on Russian Ban

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading flat after giving back earlier gains and actually moving lower during an intraday period of heightened volatility.

Monday’s more than 7% surge was fueled by reports of a potential European Union (EU) oil embargo on Russia. Today’s early weakness was the result of a split vote in the EU. Nonetheless, persistent supply risks limited the decline and could actually lead to higher prices later in the session.

At 12:32 GMT, May WTI crude oil futures are trading $110.88, up $0.91 or +0.83%. June Brent crude oil is at $113.08, up $1.16 or +1.04%. On Monday, the United States Oil Fund ETF (USO) settled at $79.53, up $4.89 or +6.55%.

Numerous factors are also helping to underpin prices including an on-going U.S. ban on Russian crude oil and oil products, threats to supply from the war in Ukraine, attacks by Yemen’s Iran-aligned Houthi group on Saudi energy, and low U.S. supply.

Bullish Factor:  Threats to Supply Due to War in Ukraine

The EU and allies have already imposed a plethora of measures against Russia, including freezing its central bank’s assets.

At the start of the week, Ukraine defied a Russian demand that its forces lay down arms before dawn on Monday in Mariupol, where hundreds of civilians have been trapped in a city under siege. With little sign of the conflict easing, the focus returned to whether the market would be able to replace Russian barrels hit by sanctions.

Essentially, optimism over progress is talks to achieve a ceasefire in Ukraine is beginning to erode, which is helping to support prices.

Bullish Factor:  Iran-aligned Houthi Attack on Saudi Arabia Oil Facilities

Crude oil traders are also on edge after a Saudi-led coalition said early on Sunday that the Iran-aligned Houthi group launched four attacks on the kingdom that damaged civilian cars and homes but caused no casualties.

The Saudi state news agency (SPA) said one attack targeted a water desalination plant in the city of Al-Shaqeeq, an Aramco facility in Jizan, a power station in the southern Dhahran al Janub city, and a gas facility in Khamis Mushait.

State television al-Ekhbariya later cited the coalition as saying it had intercepted and destroyed three drones that targeted economic facilities. The coalition also foiled an attack on an Aramco Liquefied Natural Gas (LNG) facility in the Saudi city of Yanbu, state television reported.

Traders should continue to monitor this situation for any signs of escalation that directly limits the supply of crude oil.

Short-Term Outlook

Prices are expected to remain underpinned over the short-run, but traders could face some headwinds. For example, European Union foreign ministers are split on whether to join the United States in banning Russian oil. Some countries, including Germany, say the bloc is too dependent on Russia’s fossil fuels to withstand such a step.

A strong dollar is also making crude more expensive for other currency holders and tends to weigh on risk appetite.

Meanwhile, the focus later in the session will be on the latest round of U.S. inventory data, which analysts expect to show no change in crude oil stocks. The American Petroleum Institute (API), an industry group, issues its supply report later on Tuesday at 20:30 GMT.