Oil Prices Ready To Rally As EU Agrees To Sanction Russian Oil Imports

Key Insights

• EU has finally managed to reach a deal on the Russian oil embargo. 
• Hungary will continue to get oil by pipeline, but the majority of Russian oil will move away from European markets. 
• Demand is rising as the driving season begins while China ends lockdowns, which is bullish for oil markets. 

WTI oil moved closer to the $120 level after EU agreed an embargo on Russian oil imports. The embargo will be fully implemented closer to the end of the year, with exemptions for pipeline imports to Hungary, Slovakia and Czech Republic.

Waiting For The Details On Oil Embargo

The current target is to eliminate 90% of Russian oil imports by the end of this year. To achieve this goal, EU will have to cut seaborne imports, while Germany and Poland would voluntarily stop importing Russian oil via pipeline.

Such measures could not be implemented overnight, so the key thing to watch is the actual schedule. EU will have to search for other sources of oil, which will take some time.

However, the big picture is clear: EU is moving away from Russian oil. Meanwhile, Russia will have to cut its oil production as it is impossible to find buyers for these volumes in the near term due to logistical constraints.

Thus, the global oil market supply will decrease at a time when oil prices are at multi-year highs, which is bullish for oil.

Key Catalysts To Watch

There are several key catalysts that would determine the direction of oil markets this summer.

China’s lockdowns are coming to an end, which will immediately increase demand for oil. Demand from China could be the biggest catalyst for oil markets in the next few weeks.

Meanwhile, the driving season has begun, which is also bullish for oil markets. Traders will need to monitor whether high prices have any impact on gasoline and diesel demand. If demand stays strong, fuel stocks will decrease, pushing prices higher.

Traders will also need to monitor weather forecasts as warm weather may have a significant impact on demand for air conditioning.

At this point, it looks that WTI oil has a good chance to settle above the $120 level and move closer to March highs near the $130 level as demand from China is set to increase in the near term. In the longer term, the strength of demand during the driving season and the details of the new sanctions on Russian oil will have a material impact on oil price dynamics.

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