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Prices Rally as European Union Weighs Oil Ban Proposal
The European Union (EU), eager to distance itself from the Kremlin following its invasion of Ukraine, proposed Wednesday an embargo on Russian crude within six months. The measure, anticipated for weeks, would also cut off refined oil products from Russia by the end of 2022.
EU members were debating the proposal Wednesday. It would follow a U.S. ban on Russian oil and gas imposed by the Biden administration in the early days of the war. Russia launched the assault on its eastern European neighbor in late February.
The news sent already lofty oil prices surging Wednesday. West Texas Intermediate and Brent crude prices both climbed more than 4% in early trading, rising higher above the $100/bbl threshold.
Western sanctions against the Kremlin in protest of the war, including the U.S. ban, shaved more than 1 million b/d from global supplies.
Should the EU follow suit, it could more than double the hit to global supplies at a time when other major producers – namely the United States and OPEC – are gradually boosting output, according to the U.S. Energy Information Administration (EIA).
Prior to the war, the EU was importing between 3.0 million b/d and 3.5 million b/d from Russia. The amount represented about 27% of EU oil imports, noted Mizuho Securities USA LLC’s Robert Yawger, director of energy futures. EU members sent “just under $400 million a day in payment to Russia,” he said.
Countries across Europe also are moving with haste to wean themselves from Russian natural gas, amplifying the already substantial need for U.S. exports following a cold European winter. This has fueled multiple rallies in U.S. gas markets, including a burst this week that sent Henry Hub futures above the $8 threshold.
American producers have boosted crude supplies this year to nearly 12 million b/d, according to the U.S. Energy Information Administration. Still, output remains more than 1 million b/d below pre-pandemic highs. Producers are hesitant to move too aggressively because of investor demands to preserve cash, return capital to shareholders and develop renewable energy projects.
“The end result is that the impulse to respond to higher oil and gas prices by increasing production has not been nearly as strong as it had been over the last two decades,” said RBN Energy LLC’s Rick Smead, managing director.
OPEC-plus, an extension of OPEC, recently agreed to extend monthly production increases of about 400,000 b/d through May. This has been policy since last August, but it represents a gradual unwinding of nearly 10 million b/d in cuts made in April 2020 at the onset of the pandemic.
The United States and allied countries in the West this spring committed to releasing 240 million bbl of oil from strategic reserves this year to offset the impacts of sanctions against Russia. However, this would only ease supply pressure for a matter of months and would do little to account for an EU ban on Kremlin-backed crude, according to Rystad Energy.
All 27 EU countries would need to approve the Russian oil embargo for it to become policy. EU officials told reporters in Brussels, where members of the bloc were meeting, that they hoped for a decision this week.
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