What Does EU’s Partial Russian Oil Embargo Mean for Traders?

A few of days ago, the European Union agreed to ban Russian seaborne oil imports, which is likely to intensify trade flows and add to price pressure, as European countries need to find alternative supplies to meet their demand. What will be the impact of this ban on the oil market? How far can crude prices go? What can you take advantage of? Let’s find out!

EU’s partial oil ban: What has been agreed?

This past Monday, in the sixth round of recent sanctions designed to cripple the Russian ‘war machine’, the European Union and its 27 member states have agreed to a ban on the majority of Russian crude oil imports, as punishment for its invasion of Ukraine.

In the hopes of eventually cutting all oil imports from the region completely, seaborne oil has been banned immediately, which comprises around two-thirds of imports into the EU. Germany and Poland have also pledged to cease their imports of Russian oil via the Druzhba pipeline by the close of the year.

There are, however, some exceptions to the embargo – Hungary, which gets about 65% of its oil and about 85% of its gas from Russia, was opposed to the ban and has been granted a temporary exemption to continue to import Russian oil by the Druzhba pipeline. The pipeline will continue to also supply Slovakia and the Czech Republic for the time being. No timeline has been set for the cessation of the exemption.

According to the European Commission, Russia supplied roughly 27% of the EU’s crude oil requirements and 40% of EU’s total gas consumption in 2021. Gas imports have so far continued unsanctioned: however, plans for a gas pipeline from Russia to Germany have been put on ice.

The previous five rounds of sanctions have included freezing Russia’s central bank assets, banning imports of Russian commodities such as coal, and excluding Russian financial institutions from the SWIFT messaging system – and this new set of sanctions is no exception.

Moscow has vowed to find new avenues to support its exports. In response to the onslaught of recent sanctions, the country has banned a number of exported products of its own. These include over 200 products such as vehicles, medical & telecom technology, and timber, which will affect around 48 countries, including the US and the EU.

Since the beginning of the conflict, Russia also disrupted oil supplies to some countries, such as Finland, Bulgaria, and Poland, and to companies in the Netherlands and Denmark.

Oil prices jumped on the news, but quickly reversed

Both oil benchmarks, the Brent crude, and the U.S. West Texas Intermediate (WTI) crude ended the month of May higher for the sixth straight month.

After the news of the Russian oil embargo, oil prices jumped above $120 a barrel, a level not reached since March 2022, which was itself the highest level since 2008. This peak was also supported by the news of ending lockdowns in big Chinese cities like Shanghai, which might prompt higher fuel demand.

However, prices quickly reversed to around $115 a barrel after OPEC members were told to be prepared for an output increase. Today, prices are trading slightly higher, at almost $117 at the time of writing.

Source: ActivTrader trading platform from ActivTrades

How will this ban affect oil prices over time?

Over the past several months, oil and gas prices (among other energy commodities) rose to hit fresh record highs as the supply disruption from the war in Ukraine intensified and producers struggled to match rising demand. If the market continues being tight, and the demand keeps rising, then prices are very likely to keep moving upwards.

This new decision will certainly trigger a supply shock, especially as the summer travel season is coming very soon. Will this situation cause shortages in the European Union for the holiday season? But the impact of this news goes beyond travelers, as it might discourage consumers to spend altogether.

​​With inflation hitting new records in many countries around the world, consumers are second-guessing their purchase decisions or seeking out alternatives, and this might trigger “demand destruction”. In economics, “​​demand destruction” occurs when a continuous drop in demand for a particular product/service (because of continuing elevated prices) threatens the global economic outlook and/or intensifies the economic slowdown.

What does it mean for traders?

While there are different factors that can impact oil prices, like the value of the American Dollar, as well as global economic prospects and consumption habits, the relationship between supply and demand is the main factor that influences the direction of oil prices.

News about the exclusion of Russian crude oil from the global markets and recent rising energy prices might trigger a global recession, which will, in turn, reduce the demand for oil and lower prices if the offer remains the same.

On the other hand, some investors are planning on investing in oil with a relatively long-term time-horizon to take advantage of potentially higher prices over time, as supply uncertainty accumulates and the amount of oil available is limited, which tends to support oil prices.

As the situation with Russia is likely to continue adding pressure to the oil market, triggering higher short-term volatility, other investors will trade oil more actively, such as scalpers, day traders, and swing traders.

Savvy short-term traders can take advantage of volatile prices through different financial derivative products, such as CFDs (or “Contracts For Difference”), to take advantage of the numerous, rapidly rising and falling price movements.

In any case, always remember to follow your trading plan and apply money management rules to better protect your capital. Also, keep in mind your time horizon and financial goals to avoid letting your emotions take control in case of adverse price movements.