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Oil (WTI-June Exp) made a multiday high around 110.80 early U.S. sessions Monday, surged almost +0.28% from Friday close around 110.49 on hopes & hypes of an all-out EU embargo on Russian supply. But Oil is also undercut by the concern of synchronized global stagflation amid faster Fed tightening and China’s zero COVID lockdown policy. Oil made a low around 108.25 in early Asian sessions Monday after subdued economic data from China, the world’s 2nd largest consumer of oil.
Almost 46 cities in China are under full/partial lockdowns, affecting economic activities including shopping, production/factory output and energy/oil demand. Chinese refiners processed 11% less crude oil in April; with daily processing the lowest since the March’20 COVID peak. China processed 12.61 mbpd crude oil in April against 13.8 mbpd sequentially (March) and 14.09 mbpd a year ago (Apr’21). But on Monday, China also announced a gradual plan to exit COVID lockdown from 1st June after terrible economic data amid more than 6-weeks of full/partial lockdown across the country. Subsequently, oil got some boost.
The 6th round of EU sanctions including a ban on Russian oil has been drawn up by the European Commission on the 4th of May, but Hungary and certain other EU member states, including Slovakia and the Czech Republic, have voiced reservations against an all-out ban on Russian oil. On Monday, all EU Foreign Ministers (FMs) were scheduled to meet for a detailed discussion and decision on the Russian oil embargo. EU FMs are now trying to put pressure on Hungary, whose PM Orban is the major obstacle to passing an embargo on Russian oil. Orban, whose landlocked country depends on Russia for around 60% of its oil, has remained steadfast in his opposition to the latest EU proposal of an all-out ban on Russian oil.
Orban has not been convinced by a provision that would have granted extensions of up to 12 months to Hungary, the Czech Republic, and Slovakia to help the land-locked countries secure alternative oil supplies. Orban flatly dismissed that proposal barely after two days it was introduced by the EU commission, saying the timeline was not nearly long enough and would amount to a ‘nuclear bomb’ for the Hungarian economy.
Since the complete Russian oil ban proposals, EU officials have made a series of concessions. A plan to ban EU ships from transporting Russian oil was dropped, after opposition from Greece and Cyprus, which worried about their industries, would lose out to competitors. EU even offered various EU states/countries that are heavily dependent on Russian oil an option to delay joining the EU embargo instead of indirect support. Hungary and Slovakia were given until the end of 2024, while the Czech Republic has been offered a June 2024 deadline. While Slovakia and the Czech Republic appear ready to sign off the sanctions, Hungary continues to hold out on the oil embargo, which the Hungarian PM Orban even compared the EU embargo proposal to an atomic bomb hitting his country’s economy!
On Monday, Hungary’s PM Orban said his country would not block EU oil sanctions against Russia, as long as it posed no risk to Hungary’s energy security. Hungary is now seeking additional aid to the tune of €15-18B from the EU for the “complete modernization of the Hungarian energy infrastructure to phase out Russian oil. Hungary also urged the EU to come up with a plan.
The Hungarian Foreign Minister said: “It is legitimate for Hungarians to expect a proposal from the European Commission. The European Commission has caused a problem with a proposal so it's a rightful expectation from Hungary--- that the EU should offer a solution: to finance the investments and compensate for-- the (resulting) price rises which necessitate a total modernization of Hungary's energy structure in a magnitude of 15-18 billion euros.”
Hungary said it needs five years and billions of Euros to convert its refinery near Budapest, which can take only Russian oil and Croatia must boost its capacity to ensure an alternative smooth oil supply. In brief, the EU struggles to reach a consensus over Russia's oil embargo as Hungarian ‘hostage’. All EU27 member states must agree on the embargo for it to come into effect.
Since all EU countries must vote unanimously to approve any sanctions package, Hungarian PM Orban could single-handedly block the latest EU sanctions package against Russia. Ukrainian Foreign Minister (FM) Kuleba is also attending EU FM meetings on the Russian oil embargo and has stressed the importance of including the oil ban in the latest round of sanctions, warning that the EU would be giving Russia cause for celebration if it did not reach an agreement.
In the early US session Monday, oil jumped after comments from Ukraine’s Foreign Minister Kuleba: “EU foreign ministers didn't agree on oil yet, but I believe an oil embargo is to come, the question is when. Issues of weapons and oil are more or less on track. Only one EU country is against the EU ban on Russian oil.”
On Monday, both Austria and German Foreign Ministers said they expected the EU to agree on the Russian oil sanctions/embargo in the coming days. Germany said it's willing to go ahead with an all-out ban on Russian oil imports even without unanimous support from the rest of the EU.
The EU's sixth sanctions package, which would end imports of Russian crude and refined products by the end of the year, has been held up by opposition from Hungary and other member states in central and eastern Europe. Lithuania’s foreign minister said: “Unfortunately the whole union is being held hostage by one member state (Hungary). Everybody expected this will be enough”.
Meanwhile on Monday, before the EU FM meetings on the Russian oil embargo, the EU Foreign Policy chief Borrell said there were no guarantees the issue would be resolved: “---some member states face more difficulties because they are more dependent because they are landlocked. We will do our best in order to deblock the situation. I cannot ensure that it is going to happen because positions are quite strong.”
Oil was also boosted after a report indicated the European Commission may also ban all shipping, brokerage, insurance and financing companies related to the import and transport of ‘dirty’ Russian oil to the EU. The market is concerned that such an EU ban on insurance and transport entities may also affect the global trade of Russian oil as almost 95% of the world’s taker liability/insurance coverage goes through a U.K./London-based global insurance group.
On Friday, EU leaders drafted guidance on Russian gas payments, seeking to add clarity within the common bloc and help member states avoid any possible sanctions violations as they continue to import Russian gas. As a recapitulation, Putin issued a decree in March ordering all ‘unfriendly nations’ to begin paying for their gas in Russian currency Rubles or face the risk of getting cut off. Russia said such countries could make payments in euros or dollars in a special account to its state-owned bank, Gazprombank, which it would then convert to rubles; but the EU had stopped short of saying whether making those payments would amount to a breach of sanctions.
As per the latest EU Commission draft: EU sanctions do not prevent economic operators from opening a bank account in a designated bank for payments due under contracts for the supply of natural gas in a gaseous state, in the currency specified in those contracts. Operators should make a clear statement that they intend to fulfill their obligations under existing contracts and consider their contractual obligations regarding the payment already fulfilled by paying in euros or dollars, in line with the existing contracts.”
Oil was also upbeat as OPEC+ may not extend its gradual output increase plan after June on the concern of lower demand amid lingering Chinese zero COVID lockdown, Russia-Ukraine war, higher inflation, faster Fed tightening, and subsequent probabilities of synchronized global stagflation or even an outright recession. In its latest monthly oil market report, OPEC slashed the global oil demand estimate by -0.67 mbpd to 98.44 mbpd for Q2CY22. But as of now, OPEC also sees average global oil demand above 100 mbpd marks in Q3 and 106.24 mbpd in Q4CY22.
Also, the oil demand in the U.S. as well as in Europe is expected to remain strong as the peak driving season in the summer is approaching. Overall, at a glance, as per OPEC estimate for 2022, global oil demand maybe around 100.29 mbpd against a supply of 94.62 mbpd; i.e. there may be a supply shortage of around -5.67 mbpd against a 2021 supply deficit of around -6.93 mbpd.
Meanwhile, hopes for an imminent Iran nuclear deal fade despite the best effort by EU negotiator Mora as US Congress opposes the idea of lifting sanctions on the IRGC (Iran’s army). OPEC continues to undershoot its oil production target in the OPEC+ deal, failing in April to boost output as much as required by the agreement. All 13 members of OPEC – including Iran, Libya, and Venezuela exempted from the OPEC+ deal – saw their production rise by just 0.153 mbpd collectively, to 28.648 mbpd in April.
The top three OPEC producers, Saudi Arabia, Iraq, and the UAE, saw the highest increases in their respective oil production in April, while output in Libya plunged by 0.161 mbpd to below 1 mbpd at 0.913,000 mbpd amid widespread unrest. Libyan oilfields and terminals have again been under blockade in recent weeks amid protests, clashes, and disputes over the distribution of oil revenues in the country with two rival governments. Excluding Libya and the other two producers exempted from the OPEC+ deal, the ten OPEC members bound by the agreement saw their collective production at 24.464 mbpd in April against a collective quota of 25.315 mbpd.
The production gap is around -0.851 mbpd, mostly due to lingering underperformance from African producers like Angola and Nigeria, which have been pumping 0.30-0.40 mbpd below quotas each, for months, due to a lack of oil capex and spare capacity. Saudi Arabia, OPEC’s largest producer is thus increasing its production to make up the deficit as it’s probably the only big producer in the world, which has more than 1 mbpd spare capacity. OPEC’s 2nd largest producer, Iraq, boosted production by 0.103 mbpd to 4.405 mbpd, nearly reaching its April quota of 4.414 mbpd.
Saudi Arabia’s Energy Minister Salman (ABS) said his country is preparing to hike production by +1 mbpd to over 13 mbpd by Dec’26 or Jan’27. But Saudi Arabia’s and Bahrain's energy ministers also said pumping more oil won’t ease gasoline prices as there is no refining capacity to speed up the production.
As highly expected, on 5th May, OPEC+ agreed to leave its oil production plan unchanged, aiming to boost production in June by 0.432 mbpd. While OPEC+ is sticking to its policy of modest monthly increases, many of its members are not able to pump to their quotas and the cartel is estimated to be around 1.5 mbpd below its quota.
Oil remains in a supply deficit position, which is supporting the elevated price amid lingering geopolitical uncertainty over Russia-Ukraine/NATO.
Looking ahead whatever may be the narrative, technically oil has to sustain over 113.55 for 116.50/117.00-125/130.00zones; otherwise sustaining below 113.25, it may again correct to 95.00-80.00 levels.
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