Oil rally stalls as EU remains split on sanctions
Oil prices stumbled today as the prospect of a European Union (EU) embargo on Russian oil faded – while the dollar also strengthened in the US.
After prices jumped seven per cent yesterday, Brent Crude dipped 0.8 per cent to $114.80 per barrel while WTI Crude fell 1.09 per cent to $110.90.
EU foreign ministers remain split on whether to follow the UK and US in banning Russian oil, with unanimity required for such a drastic measures to be pushed through.
Poland, Ireland and Lithuania have called for the measures in recent days, ahead of US President Joe Biden’s visit to the continent this week.
However, both Germany and Netherlands both consider the bloc too dependent on Russian fossil fuels to impose energy sanctions – relying on Russia for 30 per cent of its oil and 40 per cent of its natural gas.
Commenting on the possibility of energy sanctions, Commerzbank analyst Carsten Fritsch said: “It is still not clear whether this will really happen, as a number of EU member states are too dependent on Russian oil to be able to easily find an alternative source of supply at short notice. Not all EU countries therefore support the idea, yet a decision of this kind requires unanimity.”
Bruegel and UBS have both warned that cutting off Russian fossil fuels from European markets would require sharp reductions in personal consumption alongside the purchase of oil from other suppliers to stave off supply shortages.
The International Energy Agency last week published a 10 point plan to cut global dependency on Russian oil in half, exposing the painful realities of such a move.
The plan included measures such as car-free Sundays in cities and working from home three days a week.
Oil was also pressured by a recovering US dollar – which enjoyed gains amid suggestions from US Federal Reserve Chair Jerome Powell of a more aggressive tightening of monetary policy.
A strong dollar generally makes crude more expensive for other currency holders and tends to weigh on risk appetite.
Nevertheless, prices remain elevated well above $100 per barrel – even if prices have dipped below 14-year peaks of $139 recorded earlier this month.
Craig Erlam, senior market analyst at OANDA, anticipated prices would remain elevated.
He said: “A seven per cent surge in oil prices on Monday was always going to be difficult to sustain and today’s modest declines are a reflection of that. Whether fuelled by the prospect of an EU ban on Russian imports, Chinese lockdowns being less economically restrictive, or the dimming prospects for substantial Saudi output increases; it seems oil traders aren’t willing to give up the gains that easy.”
Commenting on possible EU sanctions, Erlam added: “It’s going to be tough for the EU to agree on a ban that isn’t phased in over time as they’re simply too reliant on Russian oil. In years gone by, maybe. But supplies are too tight and it will take time to source alternative producers.”
The next headwind for the oil market is latest supply report from the American Petroleum Institute, which will be published tonight.