The price of oil continues to rise on Thursday amid the announcement of the European Union's plan providing for the phasing out of imports of Russian oil. In addition, traders are focused on the OPEC+ meeting, during which, most likely, a decision will be made on a small increase in production.
The price of July futures for Brent crude oil on the London ICE Futures exchange rose in the morning hours of the European trading session to $110.59 per barrel, which is 0.41% higher than yesterday's final price. These contracts rose by almost 5% on Wednesday, eventually reaching $110.14 per barrel.
WTI crude futures for June on the electronic trading of the New York Mercantile Exchange rose by 0.10%, reaching $107.91. The day before, the value of these contracts increased by 5.3%, to the level of $107.81.
Yesterday, the main trigger for the growth of quotes was the news that the head of the European Commission, Ursula von der Leyen, announced her intentions to introduce a complete ban on Russian oil supplies. A plan was also announced, according to which the achievement of this goal will be implemented, albeit in stages, but rather quickly – over the next six months. At the same time , U. von der Leyen added that such a rapid rejection of oil and petroleum products from the Russian Federation should not significantly affect the European economy.
Despite the stated intentions, the permanent Representatives of the EU countries failed to reach an agreement. According to Reuters, a single solution cannot be reached for an understandable reason: for some EU countries, such a commodity embargo could turn into an economic collapse.
For example, the Hungarian oil and gas company MOL admits that it cannot give up Russian oil yet. The head of the group of companies, Zsolt Ernadi, said during the annual general meeting that it should take at least 3-4 years to completely abandon Russian oil. Moreover, this refusal implies costs about $500-700 million from Hungary. If a complete embargo on Russian oil is imposed, then even with alternative supplies, the Danube Refinery will have to reduce production by at least 20%, and the Bratislava refinery by all 30%.
Ernadi rightly noted that most countries located near the sea cannot quickly abandon raw materials from Russia, otherwise an acute shortage of products will begin in these countries, the economy will significantly sink and inflation will soar even more. For the whim of the heads of the EU to bring unprecedented sanctions on Russia, countries such as Hungary, Slovakia, the Czech Republic and Serbia will not be able to resist these sanctions in the first place.
Prior to that, Hungarian Minister of Foreign Economic Relations and Foreign Affairs Peter Szijjarto, during his visit to Kazakhstan, recognized the direct dependence of his country's economy on Russian oil. Thus, 65% of oil comes to Hungary from Russia through the Druzhba oil pipeline, and there is no other route that could supply the Hungarians with the necessary amount of oil at the country's disposal.
Slovak Energy Minister Karol Galek also looks with great skepticism at the complete refusal of Russian supplies to Europe. According to him, the European Commission's plan to ban the import of petroleum products from Russia, which the EU intends to implement by the end of this year, risks completely destroying the EU economy. Galek is sure that the period specified in the plan is clearly not enough to abandon Russian raw materials. It will take Western Europe at least three years to replace Russia with other suppliers of oil. The Minister of Energy of Slovakia fully agrees with the aforementioned representative from Hungary on this issue: a quick rejection of resources from Russia will destroy the entire energy supply sector in Slovakia, Austria, the Czech Republic, and even Ukraine.
Japan is not ready yet to join the EU's plans and reduce imports of Russian oil. This was stated by Japanese Economy Minister Koichi Hagiuda to reporters in Washington. Japan clearly does not have enough of its own resources for such bold steps, although Tokyo fully supports the position of the US leadership regarding the introduction of new sanctions against Russia and is ready to discuss this topic with G7 partners.
Japan, in its desire to reduce its dependence on Russia, is ready to increase its dependence on the United States, and therefore asked Washington to increase the production of liquefied natural gas. The Japanese government is even considering the possibility of issuing loans to those Japanese companies that plan to be involved in American LNG production projects.
Bulgaria also stated that there are no alternatives to Russian imports for them at the moment. According to the management of Lukoil Neftochim Burgas, technically Bulgaria can process oil from the Middle East and North Africa, but this will significantly reduce the capabilities of refineries. It is predicted that, in the event of an embargo on Russian oil, fuel prices in Bulgaria will increase by 20-30%.
OPEC Secretary General Mohammed Barkindo openly admitted that today there are no spare capacities in the world capable of replacing the volumes of oil from Russia. In other words, the energy market will definitely feel a strong effect from the likely losses of such an impressive volume of raw materials.
German Economy Minister Robert Habeck said on RTL Direct that if an embargo on Russian oil supplies is imposed, there will be a temporary shortage of gasoline in the country. This applies mainly to those regions where gasoline is supplied by the Schwedt refinery, which operates exclusively on Russian oil. These are the regions of East Germany and Greater Berlin.
No matter how the price of oil changes on the world market, the cost of oil and its derivatives for Europe will definitely increase in the light of import blockages from Russia. This will be due to the difficulties that have arisen in logistics, since the bulk of oil enters the European market only at the expense of intermediaries. It is clear that these intermediaries will supply raw materials, including from Russia.
According to the data released the day before by the American Petroleum Institute, the reserves of this raw material and fuel in the United States decreased significantly last week (April 25-29), namely by 3.5 million barrels. According to a survey by the Reuters news agency, the drop was expected to be only 800,000 barrels.
As for the expected meeting of the OPEC+ committee, earlier recommendations regarding oil production in June were as follows: adhere to the plan to increase the quota by 432,000 barrels per day. A full-format meeting of the ministers of the OPEC+ committee, at which this issue will be resolved, is expected today.
The global manufacturing purchasing Managers' Index declined in April for the first time since June 2020, helped by tight quarantine in China's two largest cities.
According to Caroline Bain, chief commodities economist at Capital Economics, demand for commodities will only decrease. Rising inflation and higher interest rates will eventually do their job – the population will start consuming less. Therefore, the key factor in the formation of prices for oil and petroleum products in this and next years will not be limited supply, namely restrained demand.
