May 31, 2022
Oil headed for its longest run of monthly gains in more than a decade as European Union leaders agreed to pursue a partial ban on imports of crude from Russia while China further eased anti-virus curbs, aiding demand.
Brent crude topped $124 a barrel, hitting the highest level since early March. The latest round of EU sanctions would forbid buying oil from Russia delivered by sea but includes a temporary exemption for pipelines, European Council President Charles Michel said. The package, designed to punish Moscow for the invasion of Ukraine, also proposes a ban on insurance related to shipping oil to third countries.
The EU’s move was agreed during a leaders’ summit in Brussels after members accommodated objections from Hungary, which had been blocking the embargo as it sought assurances that its energy supplies wouldn’t be disrupted. Under the deal, the country would continue to receive Russian oil via pipeline.
“If it is implemented as mentioned before, Russian oil will still flow to Europe over the coming months, but essentially the ban is likely to boost even more longer dated prices,” said Giovanni Staunovo, a commodity analyst at UBS Group AG. “The stronger factor to watch is the re-opening of China and the summer travel plans in the Western World.”
Oil’s surge has helped to spur the fastest inflation in decades, prompting central bankers including the US Federal Reserve to tighten policy. Later on Tuesday, US President Joe Biden will hold a rare Oval Office meeting with Chair Jerome Powell to discuss the state of the American and global economies.
The war in Ukraine has upended global crude flows, ushering in a period of intense volatility as traders price in waves of disruption, as well as increased consumption in most economies. The EU’s latest push follows bans by the US and UK on Russian exports, although buyers in Asia — particularly China and India — have stepped in to take more of the shunned cargoes.
In China, there are further signs of lockdowns easing, stoking mobility. Shanghai will let people in areas deemed low risk for Covid-19 leave housing compounds, as the key hub moves to dismantle the last remaining curbs that confined most of its 25 million residents to their homes for two months.
The oil market is steeply backwardated, a bullish pattern marked by near-term prices trading at a substantial premium to longer-dated ones. Brent’s prompt spread — the difference between its two nearest contracts — was $4.30 a barrel in backwardation, up from $2.20 at the end of April. Another widely watched metric, the December-December differential, neared $16 a barrel.