Failure to implement Russian oil ban could send oil down to $65

A key factor at the upper end of the benchmark crude oil trading ranges over the past few weeks has been market concern over a ban on Russian oil exports to the European Union (EU). Before Ukraine’s invasion, Europe imported about 2.7 million barrels per day (bpd) of crude oil from Russia and another 1.5 million bpd of petroleum products, mostly diesel. This fear, however, is greatly exaggerated for several reasons analyzed below. Removing this particular fear factor in the price of oil will allow oil prices to return during this year to where they were before the Russia-Ukraine “war bounty” began to be priced in by the smart money in September 2021, which was around US$65 per barrel (bp) of Brent. The main reason why a meaningful EU ban on Russian oil (or gas) will not happen is that it would require the unanimous support of all of its 27 member countries. Even before the 27 EU member states met on May 8 to discuss the continuation of the ban on Russian oil, Hungary and Slovakia had made it clear that they were not going to vote in favor of it. According to figures from the International Energy Agency (IEA), Hungary imported 70,000 bpd, or 58%, of its total oil imports in 2021 from Russia, while Slovakia’s figure was even higher. high, at 105,000 bpd, or 96% of all imports. its oil imports last year. Other EU countries also heavily dependent on Russia’s southern Druzhba pipeline that runs through Ukraine and Belarus have also signaled they are unwilling to support a ban on Russian oil exports, including the noisiest has been the Czech Republic (68,000 bpd, or 50% of its oil imports in 2021 came from Russia) and Bulgaria (which depends almost entirely on gas supplies from Russian state oil giant Gapzrom , and its sole refinery is owned by Russian state-owned oil giant Lukoil, supplying more than 60% of its total fuel needs). Other EU member states that are also particularly dependent on Russian oil imports are Lithuania (185,000 bpd, or 83% of its total oil imports in 2021) and Finland (185,000 bpd, or 80% of its total oil imports). Even the compromise proposals proposed by the EU to allow Hungary and Slovakia to continue using Russian oil until the end of 2024 (and the Czech Republic until June 2024) have not been enough to lift their opposition to the idea of ​​an EU ban on Russian oil.

Related: The real reason gasoline and diesel prices are so high

In fact, the only real flurry of activity in terms of a concerted effort by any group within the EU since Russia invaded Ukraine on February 24 has been to ensure that Russia does not stop supplying its Member States with oil or gas because of their inability to pay in the way that Moscow prefers. This followed the March 31 decree signed by Russian President Vladimir Putin requiring EU buyers to pay in rubles for Russian gas through a new currency conversion mechanism, or risk having their supplies suspended. According to an official guidance document sent to the 27 EU member states on April 21 by its executive branch, the European Commission (EC): “It seems possible [to pay for Russian gas after the adoption of the new decree without being in conflict with E.U. law],… EU companies can ask their Russian counterparts to fulfill their contractual obligations in the same way as before the adoption of the decree, that is, by paying the amount due in euros or dollars. The EC added that existing EU sanctions against Russia do not prohibit engagement with Gazprom or Gazprombank, beyond the bank’s refinancing bans.

Not only have several EU member states made it clear that they will veto any EU proposal to ban imports of Russian oil (or gas) – and recall that the 27 EU member states have to vote in favor of such a ban for it to come into force – but also its own executive branch, the EC, has been busy sending out crib notes on how best to keep paying for Russian oil imports and of gas, in order to effectively circumvent any broader sanctions against them, including those of the United States. lack of ideological endorsement from the EU’s de facto leader, Germany, over the Russian oil embargo. There is no doubt that the practical EC directive of April 21 on how to circumvent sanctions on the payment of Russian oil imports received the tacit approval of those responsible for these matters in Germany, otherwise, quite simply, it would not have been written or sent. Germany is also expected to be hit hard by any ban on Russian oil first, and gas later, being the 2021 recipient of Russia’s crudest crude oil of any EU country – an average of 555,000 bpd, or 34% of its total oil imports that year, according to the IEA. German Economy Minister Robert Habeck’s comments that Berlin was ready to ban Russian energy imports were covered in considerable detail about how Germany has still not been able to find alternative sources of long-term fuel supply for Russian oil which arrives by pipeline to a refinery in Schwedt operated by Russian oil giant Rosneft. He concluded that fuel prices could rise and that an embargo “in a few months” would give Germany time to organize itself in this regard.

Germany’s lack of clear leadership in the EU is not just another reason why there will be no meaningful EU ban on oil (and gas) Russian soon, if ever, but also opens up the likelihood that even if there were such a ban on it, there would be more holes than a good Swiss cheese, just like the previous bans and sanctions on Iran . As analyzed in depth in my new book on world oil marketsGermany was at at the forefront in the EU of a series of measures designed to circumvent pre-2011/2012 primarily US-led sanctions. Shortly after the United States announced its unilateral withdrawal from the JCPOA agreement in May 2018, the EU decided to impose its “blocking law” which prohibited European companies from following US sanctions. Around the same time, German Foreign Minister Sigmar Gabriel warned: “We must also tell the Americans that their behavior on the Iranian question will lead us Europeans to adopt a common position with Russia and China versus the United States. Soon after, Germany played a key role in the EU by introducing a special purpose vehicle – the “Trade Support Instrument” – which would act as a clearing house for payments made between the Iran and the EU companies working there.

Related: Germany to end Russian oil imports regardless of EU decision

All of this flim-flam rhetoric from Germany and the EU has resulted in an oil price that remains well above what it should be, given the confluence of multiple bearish factors currently in play. On the supply side, US Energy Secretary Jennifer Granholm has further pledged to engineer a “significant increase” in domestic energy supply by the end of the year, the US s also working to identify at least three million bpd of new oil supply. There remains the prospect of further strategic oil releases as needed by the United States and IEA member countries, and of a new “nuclear deal” with Iran, as the United States are always open to ideas. Additionally, the ability of the United States to pressure OPEC to increase production has been enhanced by resuscitating the threat of the “NOPEC” bill. On the demand side, there remains more likely destruction from COVID-related lockdowns across China, and no prospect of a significant easing of its “zero-COVID” policy and a series of interest rate hikes. American interests stifling economic growth elsewhere. It is pertinent to note at this point that even without these bearish factors in play, Brent crude was trading at around US$65 per billion before the real Russia-Ukraine war premium was triggered by smart money in September 2021 when US intelligence agents began noticing very unusual Russian military movements on the Ukrainian border after the conclusion of the joint Russian-Belarusian military exercises that had taken place.

By Simon Watkins for

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