Crude price spikes as EU proposes ban on Russian oil imports
A European embargo could reduce global oil supplies because not every barrel would be rerouted to buyers in other markets.
The European Union proposed a ban on imports of Russian crude within six months and on refined oil products from the country by year-end, sending crude prices higher as member states look for alternatives.
Oil prices jumped on the announcement. Brent crude futures, the international benchmark in energy markets, rose 4.9 per cent to $US110.14 a barrel. US benchmark crude was up 5.3 per cent to $US107.81 a barrel.
A European embargo could reduce global oil supplies because not every barrel of Russian oil that once landed in Europe will be rerouted to buyers in other markets, traders and analysts say. Russian production of refined oil products and crude already has fallen since the invasion of Ukraine in response to reduced demand overseas and in the domestic Russian market.
European Commission President Ursula von der Leyen outlined the proposal in a speech to the European Parliament. She said the EU’s executive body also is proposing to take Russia’s biggest bank, Sberbank, and two other Russian banks off the Swift financial-messaging system. The commission also is planning to ban three major Russian state-owned broadcasters from the EU and to target Russian military officials accused of alleged war crimes.
EU member states entered difficult discussions over the sanctions package on Wednesday night (AEST), with Hungary repeating its call for a slower transition away from Russian oil while Poland and the Baltic states saying the phase-out of oil was too slow. All 27 countries would need to sign off on the package for it to go into effect. EU officials are pushing for a decision this week.
“With all these steps, we are depriving the Russian economy from its ability to diversify and modernise,” Ms von der Leyen said.
European refiners have been scouring global markets for alternative crude sources, boosting imports from the US, West Africa and the Middle East. Diesel prices in the region, meanwhile, have climbed to records on the prospect of reduced flows from Russian refiners.
While the proposed ban would affect only oil imports, the EU also has been scrambling to diversify its sourcing of natural gas. Terminals to import liquefied natural gas took in a record amount of the superchilled fuel for the time of year in April, according to commodity-tracking firm Vortexa. Oil imports from non-Russian suppliers, meanwhile, hit their highest level since the start of the pandemic.
Companies and governments are seeking to lock in supplies in the long run. NextDecade Corp. this week said it had signed a 15-year deal to supply LNG from its Brownsville, Texas-based LNG export project to Engie SA starting in 2026.
The deal marks a U-turn for the French power company, which halted negotiations on a multibillion-dollar contract to buy NextDecade’s gas in late 2020 over concerns about the environmental effects of fracking.
U.S. and European officials have said they are working together on ways to ensure that energy sanctions hit Russia as effectively as possible.
Ms von der Leyen said the EU also will need to play its part in paying Ukraine’s wartime costs, which international institutions have said could run at €5bn, equivalent to $US5.3bn ($7.3bn), a month to keep paying salaries, pensions and other basic services. The EU also will present ideas on a massive rebuilding package for Ukraine later this month.
The EU’s move toward banning Russian oil imports marks a particularly significant escalation for the bloc because of the importance of energy exports to the Russian economy. It is also potentially costly for Europe, which is highly reliant on Russian hydrocarbons for transportation, heating, power generation and industrial production.
The proposal came after Russia cut gas deliveries to two member states last week and reflects what Western officials say is the absence of signs that the Kremlin is willing to scale back its incursion into Ukraine.
Russian oil that once went to Europe has been diverted to Turkey, India and other markets since the invasion, and analysts say China might start to buy the fuel in larger quantities when lockdowns there ease. For Russia’s oil industry, however, higher demand in Asia wouldn’t fully compensate for the loss of its biggest export market in Europe, said Giovanni Staunovo, commodities analyst at UBS Global Wealth Management.
Some member states, including Poland and the Baltic states, as well as non-member Ukraine, have urged the EU to move toward a full energy import ban, including gas. That remains off the table for now despite Russia’s decision to stop gas deliveries to Bulgaria and Poland because of what Germany and others say would be its economic cost.
Before Russia’s invasion of Ukraine, the EU was importing around 4 million barrels a day of crude oil and refined products from Russia, sending just under $US400m in payments daily, according to Brussels-based think tank Bruegel. That amounted to around 27 per cent of EU oil imports.
Oil-and-gas revenue accounted for 45 per cent of Russia’s federal government budget in 2021, according to the IEA.
Most economists say an immediate and total ban on Russian energy imports would likely push the eurozone economy into recession. In a report on the outlook for the global economy released last month, the International Monetary Fund projected a total ban would lower economic output in the European Union by 3 per cent, leading to a small contraction this year. But Russian oil is easier to replace than gas, and the impact of a limited ban on oil imports would be less severe.
In a note to clients published on Wednesday, economists at Rabobank estimated that an EU embargo on imports of Russian energy starting in the summer would double the size of the expected contraction in Russia’s economy this year to 20 per cent. But they said an embargo that was confined to oil imports would have a much more limited effect, and leave the contraction closer to the 10 per cent projected in the event that there were no new sanctions on energy imports.
Additional reporting: Joe Wallace
The Wall Street Journal