Oil gained on Thursday as the prospects for a European Union ban on crude imports from Russia seemed more likely, with an additional boost coming from a growing diesel supply crunch.
West Texas Intermediate crude climbed nearly 3% in New York after earlier swinging between gains and losses. Germany is prepared to stop buying Russian oil in a phased approach, clearing the way for a European Union ban on Russian imports. Fresh reports Thursday fueled a jump in prices. U.S. diesel futures extended its record rally as supply tightens for the product that has become the world’s most in-demand fuel since Russia’s invasion.
“The news that the EU is getting close to banning Russian energy imports gave the market a firmer tone but now heating oil is taking the lead, driving US crude futures higher,” said Spencer Vosko, oil director with energy brokerage Liquidity Energy.
The sharp gains in WTI futures briefly shrank its discount to international benchmark Brent crude to the narrowest level since January.
Germany’s Economy Minister Robert Habeck said this week that the country has already cut its reliance on Russian oil enough to make a full embargo “manageable,” potentially laying the groundwork for a continent-wide ban that would upend the global trade in petroleum. The U.S. and U.K. have already pledged to ban imports from Russia.
“With Germany open to it, the probability of a ban has increased further,” Giovanni Staunovo, a commodity analyst at UBS Group AG, said. “The question will be if also Hungary supports it or not to get it through as it needs to be unanimous.”
Chart of the Hour: U.S. diesel futures extend record rally amid tight supply
Meanwhile, oil demand in China is weaker while prices for refined products elsewhere are surging. The gap between the first and second month of New York heating oil futures has also climbed to a record of nearly 85 cents a gallon ahead of the May contract’s expiry on Friday.
It’s not just diesel markets that have been strong recently. Profits for turning crude into gasoline in the U.S. were at the highest since 2013 on Wednesday. That followed data signaling that inventories of the fuel had fallen for a fourth week.
China’s top state-run oil processor said during an earnings call that the resurgence of Covid-19 was slowing fuel demand. Hangzhou is the latest Chinese city to start mass virus testing. Traders are also grappling with just how big the hit to Russian production will be as the country’s invasion of Ukraine continues.
While crude supply is keenly focused on Russian flows, replacement barrels from the North Sea are set to dwindle in the coming months. Loadings of the grades that make up the dated Brent benchmark will fall to the lowest level since at least 2007 in June, while shipments from the Johan Sverdrup will hit a 21-month low amid a raft of planned maintenance. - Bloomberg-