Oil Price Prediction – Ukraine Stops Russian Oil Transit Over Payment Problems

Key Insights

• Russia’s Transneft cannot transit oil through Ukraine due to sanctions-related payment problems. 
• Market’s reaction is limited as traders believe that payment problems are temporary. 
• There is a big risk of a long-term halt of the oil transit through Ukraine, which is bullish for oil markets. 

No Oil Flowing Through The Pipeline Called “Friendship”

WTI oil and Brent oil moved higher after Russia’s Transneft stated that Ukraine halted oil exports to European countries. According to Transneft, Ukraine did not get transit payments from Russia due to sanctions.

The EU plans to ban most oil imports from Russia in December. G7 countries are discussing a potential price cap on Russian oil as an alternative option, but such measures can lead to a massive rally in the oil markets.

Not surprisingly, traders pushed oil to higher levels after problems with transit were made public. However, it should be noted that there was no panic in the market. At this point, the problems with transit payments are seen as temporary.

In addition, it looks that traders are once again worried about the slowdown of the economy. The weak quarterly report from Micron highlighted recession risks and put material pressure on S&P 500. Such developments cannot be ignored by oil traders even on a day when the transit from Russia to EU is halted.

What If This Is Not A Temporary Issue?

Oil flows through Ukraine to EU via a pipeline called “Druzhba” (Friendship). This oil goes to Hungary, Czech Republic, and Slovakia. The EU embargo on Russian oil excludes oil from the Druzhba pipeline.

Thus, if the “Druzhba” pipeline will not work due to sanctions-related issues, EU will implement a full embargo on Russian oil in December.

This is an important issue as excluding “Druzhba” oil from the embargo was a major diplomatic win for Hungary. Obviously, Ukraine wanted a full embargo. At this point, the details of the payment problems have not been made public. However, it looks that these problems may not be solved in the near term as Ukraine wants to put more financial pressure on Russia.

The market’s reaction is limited, but these developments are bullish for oil prices. In case traders realize that problems at “Druzhba” are not temporary, oil will get more support.

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