Oil prices are a notch lower Friday morning with Brent crude trading down 0.35% at $113.41 and West Texas Intermediate down 0.40% at $113.25, but this is only a small dent in an otherwise high oil price, the highest since the first days of the war in Ukraine. Momentum is bullish and in the short term, there is scope for prices to go much higher. For instance, a sustained break above $115 a barrel could trigger a very short-term speculative type of buying that would quickly push prices up to $124 and potentially beyond.
Market watchers point to the fact that the US is about to go into the height of the summer driving season while the supply of refined products is relatively tight. In Europe, the EU looking at potentially banning Russian oil imports is causing a lot of speculative buying.
What is happening with the Russian shipments of oil?
Despite speculation that Russian oil shipments into Europe would dry out, for the moment Russian oil shipments are still coming into Europe in almost unchanged quantities. So far, only the US and the UK have introduced a ban on Russian oil so most of the oil that is loaded on ships in the Sea of Azov (north of Crimea) is still making its way into European oil terminals.It takes around nine days from the Sea of Azov to Dutch terminals and looking at the international shipping data there hasn’t been a decline in the number of ships doing the deliveries. If the European Union were to ban imports of Russian oil this would significantly change the supply picture but for the moment, Europe has failed to reach an agreement on it.
To start with Hungary is in staunch opposition to the ban and consequently the EU has tweaked its latest package of Russia sanctions to accommodate Hungary. Secondly, since the introduction of various sanctions on Russia, Greek and Maltese ship owners have rushed into the Black Sea to provide their services. One of the reasons is that while the UK does not allow the unloading of Russian ships it still permits Russian cargos do be unloaded, provided they have been shipped under a different flag.
What does this all mean for the global oil market?
This could eventually cause a divergence between West Texas Intermediate and Brent crude prices. Data reported recently by the American Petroleum Institute is showing that the US crude oil stocks are at their lowest level since 2013 and more official data from the US Energy Information Administration due out later Friday is expected to confirm this tightness.
However, while the EU is debating a possible ban on Russian oil the resistance from Greece, Malta and Hungary will make it difficult to reach consensus on the issue and Russian oil is likely to continue flowing into Europe over weeks to come.
There has also not been any sign of decline in the global oil output, in fact, producers have recently upped output, but only moderately. OPEC argued that it makes sense to increase output only by a small amount while China is battling with the latest wave of Covid, because lockdowns in Shanghai and Beijing are also affecting local demand.
So until there really is a Europe-wide ban on Russian oil any rally in Brent crude should be viewed with some degree of caution and trading probably kept short-term.
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