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Why Oil Hasn't Spiked as EU Weighs Ban on Russian CrudeSalzman, Avi. Barron's (Online); New York (May 2, 2022). The European Union could agree as soon as this week to ban Russian oil to further isolate the country economically after its invasion of Ukraine. While the possibility of an oil embargo doesn't seem to be moving markets today, several factors surrounding it could cause large moves in the coming weeks. There's a lot on the line as the EU completes the deal. Before the war, the EU depended on Russia for about 3 to 3.5 million barrels a day of oil, or just over one-quarter of its supplies, and some European nations depend on it for more than half . Because of the sheer volume of oil involved, the move seems like a cataclysmic shift for the oil markets. But what is notable is that oil prices have barely budged as countries have moved closer to a ban. They were actually trading lower early in the day: Brent crude, the international benchmark, was down 3% on Monday morning but recovered to trade up 0.4% to $107.58 per barrel. Brent peaked in 2008 at $147 per barrel, which would be more than $180 in inflation-adjusted dollars. Oil stocks, which tend to move in line with the price of crude, have wavered in recent weeks . The Energy Select Sector SPDR Fund (ticker: XLE) was up 1.6% on Monday but is down 1.1% in the past month. The impact of Europe's potential move appears to be blunted by several factors. Demand in China has fallen sharply as the country imposes lockdowns to stop the spread of Covid-19. And the available supply is rising in some areas. The U.S. and other nations are releasing more than 1 million barrels a day from their strategic reserves, helping supply refineries and fill storage tanks that had been depleted in recent months. The reserve release won't completely replace lost Russian barrels, but it has restored some balance to the market. But the pause in oil prices shouldn't lead to complacency. The market remains undersupplied, and there are several reasons a potential EU move could lead to higher prices in the future, noted RBC Capital Markets analyst Helima Croft. Much depends on how Russia responds, assuming the EU moves ahead with an embargo. Last week, Moscow announced it would cut off natural gas to Poland and Bulgaria because those countries said they wouldn't pay in Russian rubles. A similar move to pre-empt the EU's gradual winding down of Russian oil imports could cause volatility in oil, Croft noted. "Moscow could move to curtail oil exports to Europe before year-end, which could propel prices back to the year's previous highs," she wrote. The year's highs were over $130 per barrel. Another key consideration for the oil market is whether countries in Asia continue to buy Russian oil and at what price. India, for instance, has continued to buy even as some other countries have stopped accepting Russian crude. Those purchases have held prices down: To the extent that India buys Russian oil, it needs less from other exporters, leaving that crude available for other buyers. The U.S. and Europe may have to consider whether to take action against countries that continue to do business with Russia, particularly if its alleged war crimes continue or escalate. The White House "could be forced to revisit secondary sanctions if Russian atrocities were to mount, for example through the use of chemical weapons against civilian populations," Croft wrote. "We think that Russian oil would likely have to move from being unpopular to being largely unavailable through the imposition of secondary sanctions for prices to reach the $185+ levels currently being discussed by market participants." Croft also writes that OPEC could change the calculus if the cartel decides to increase the amount of oil it is producing to make up for the loss of Russian exports. So far, OPEC has shown little appetite or ability to pump more. Write to Avi Salzman at avi.salzman@barrons.com Why Oil Hasn't Spiked as EU Weighs Ban on Russian Crude Credit: By Avi Salzman |
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