Oil prices were extending their gains on Tuesday, with US crude up by more than $3/bbl, after EU leaders agreed to cut oil imports from Russia by 90%, by the end of the year.
Brent crude continued to trade at above $120/bbl after gaining 1.9% on 30 May to its highest closing price since 8 March. The crude benchmark had a 6% rally last week.
As US markets were closed for a holiday on 30 May, WTI on Tuesday was playing catch-up with Brent crude’s strong gains.
The latest EU sanctions forbid purchase of crude oil and petroleum products from Russia delivered to member states by sea; but include a temporary exemption for pipeline crude, European Council President Charles Michel said late on 30 May during a summit in Brussels.
Some two thirds of oil imported from Russia by the EU are delivered by tankers, while a third is via the Druzhba pipeline which carries crude from the eastern part of Russia to points in Ukraine, Belarus, Poland, Hungary, Slovakia, the Czech Republic, Austria and Germany.
The embargo on seaborne oil imports would, therefore, apply to two thirds of all oil imported from Russia.
Full details of the agreement are yet to be published, but the EU move is supportive for prices, Netherlands-based banking and financial services firm ING said.
“However, the agreement has been watered down quite a bit from the original proposal. Instead of targeting all Russian crude oil imports, the EU will ban imports of Russian seaborne crude oil over the next six months,” ING said.
This would ensure supply to landlocked countries in the central and eastern Europe (CEE), which are very dependent on Russian pipeline supplies, it said.
“In theory, this should mean that around two-thirds of the roughly 2.3m bbl/day of Russian oil imported will be affected,” ING said.
However, in practice volumes are expected to fall even further, it said.
“The largest recipients of oil from the Druzhba pipeline are Germany and Poland, and both countries have already said that they aim to reduce Russian imports to zero. So, the ban could target closer to 90% of Russian flows to the EU,” ING said.
It is unlikely that the agreement reached on Monday will be the final deal as the EU will work towards reducing the dependency of Hungary and other CEE countries on Russian oil in the longer term. - ICIS-