Oil Bulls Should Beware Of Over-Exuberance On EU’s Proposed Russian Oil Ban

Key Highlights

• Oil prices are being driven higher principally by the prospect of an EU ban on Russian oil.
• However, there is a lack of unity among EU member states on imposing the ban.
• The current ban proposal must be approved by all 27 EU members to come into effect.

 

Crude oil remains towards the top end of the Brent US$102.00-113.00 trading range of the last three weeks on the bullish view that the European Union (EU) is moving towards a meaningful ban on Russian oil imports following the country’s invasion of Ukraine in February. The situation, however, as highlighted by FX Empire in the past few weeks, is not as clear-cut as it may at first appear.

The EU has stated that it would phase out Russian crude oil imports within six months and halt flows of its oil products by year-end. Before the invasion of Ukraine, Europe was importing around 2.7 million barrels per day (bpd) of crude oil from Russia and another 1.5 million bpd of oil products, mostly diesel. There is a corollary view now that Russia itself may pre-empt the EU ban on its exports, cutting off Europe from supplies sooner rather than later, leaving it scrambling to make up the deficit.

‘The Threat Of Committing Suicide Is A Poor Deterrent To Being Murdered’

However, this is to overlook the geopolitical and economic need of Russia to continue to hold the threat of pre-emptive action against the EU, rather than actually implementing it. The loss of both the political leverage that comes from its oil (and gas) supplies into the EU and the money that results from it would be a serious blow to Russia. It is reminiscent in this context of former US Secretary of State Henry Kissinger’s comment that: ‘The threat of committing suicide is a poor deterrent to being murdered.’

Aside from any other bearish oil factor – falling Chinese demand, new supplies to come from the US, short-term supplies from other countries over which Washington can still exert pressure, further SPR releases (crude stocks in the US were up 1.2 million barrels last week after more oil was released from strategic reserves, according to the EIA) and so on – the fact remains that Europe is far from unified in its approach to a ban on Russian oil.

EU Has Been More Concerned With How To Pay Russia To Keep Supplies Flowing

As highlighted by FX Empire, only recently the EU’s executive branch – the European Commission (EC) – appeared much less concerned with halting oil and gas imports from Russia and much more concerned with working out how best to continue to pay for them so that Russia would not stop them due to lack of payment.

EU members, Slovakia and Hungary – which received 96 percent and 58 percent, respectively of their oil imports from Russia last year – have also been vocal in their opposition to a blanket ban on Russian oil imports. And, key in all of this from the EU perspective, is that the current sanctions proposal needs unanimous backing by all 27 EU countries to take effect.