William Watt and Barbara Kollmeyer, , MarketWatch

NEW YORK/MADRID
EnergiesNet.com 05 04 2022

Oil futures ended sharply higher on Wednesday, after the European Union announced a proposal to phase out Russian oil.

Price action

• West Texas Intermediate crude for June delivery  CL.1, -0.11% CL00, -0.09% CLM22, -0.14%  rose $5.40, or 5.3%, to close at $107.81 a barrel on the New York Mercantile Exchange.
  
• July Brent crude  BRN00, 0.15% BRNN22, 0.15%, the global benchmark, gained $5.17, or 4.9%, to settle at $110.14 a barrel on ICE Futures Europe.
  
• June natural-gas futures NGM22, 1.18% rose 5.8% to end at $8.415 per million British thermal units
  
• June gasoline  RBM22, 0.03% jumped 4.3% to $3.652 a gallon.
  
• June heating oil  HOM22, -0.06% gained 2.8% to close at $4.197 a gallon.

Market drivers

European Commission President Ursula von der Leyen on Wednesday proposed an embargo of Russian oil imports — seaborne and pipeline — to take effect within six months, with a phase out of refined products by the end of the year. The plan is part of a sixth package of sanctions targeting Moscow over its war in Ukraine.

Traders have harbored mixed views on whether a ban of Russian oil would materialize from the bloc, though Germany last week dropped its opposition to such a move.

Von der Leyen also proposed that Sberbank, Russia’s largest bank, and two other major banks be disconnected from the SWIFT international banking payment system.

“Russia provides around a quarter of EU oil imports with Germany the top buyer importing around a third of its oil last year. This development is likely to create severe headwinds for the EU economy, particularly Germany with the potential to push price levels higher and exacerbate the inflationary backdrop,” said Victoria Scholar, head of investment at Interactive Investor, in a note to clients.

“As such the European Central Bank will be watching closely with market expectations for liftoff on interest rate hikes likely to be brought forward,” she said. European stock markets SXXP, 0.99% were under pressure.

“Now that the rug has been semi-pulled from Russia by the EU in terms of oil, the focus is expected to tighten on its gas imports and the possibility that a ban could be brokered over the longer term. But this will be an even slipperier policy to pursue given how reliant Germany still is on Russian supplies,” said Susannah Streeter, senior investment and markets analyst, at Hargreaves Lansdown.

Investors will also be watching for a Federal Reserve decision Wednesday, with expectations largely centering on a 50 basis point interest rate hike, the biggest increase in more than 20 years. Markets are hoping the Fed will get the balance right and not trigger a recession, which could dampen demand for crude.

Concerns over rising COVID cases and lockdowns in China have also been a worry for energy investors, given the country is the world’s largest energy importer.

The Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, are expected Thursday to approve a 432,000 barrel rise in production for May, in keeping with an existing timetable.

Read: Why OPEC+ keeps agreeing to oil production increases it can’t meet

Supply data

Oil remained higher after the Energy Information Administration reported a 1.3 million barrel rise in U.S. crude inventories for the week ended April 29. The unexpected rise in crude supplies, however, was accompanied by large drops in stocks of distillates and gasoline.

“A surprise dip in refining activity combined with a solid rebound in imports has yielded a minor build to crude inventories in today’s report. The Biden administration’s efforts to push crude onto the international market appear to be working as persistently solid SPR (Strategic Petroleum Reserve) releases are resulting in ongoing robust crude exports,” said Matt Smith, lead oil analyst, Americas, at Kpler.

The EIA said distillate inventories fell by 2.3 million barrels to stand 22% below the five-year average for this time of year, while gasoline stocks declined 2.2 million barrels. That said, implied demand on the four-week average for both gasoline and distillates is below year-ago levels, Smith said, offering a sign of demand destruction amid elevated prices.

Analysts surveyed by S&P Global Platts, on average, had looked for crude inventories to fall by 2.3 million barrels, while gasoline stocks were seen up 200,000 barrels and distillates down 1.2 million barrels.

The American Petroleum Institute on Tuesday afternoon reported that U.S. crude-oil inventories fell 3.48 million barrels last week, a source said, while inventories of distillates dropped 4.46 million barrels and gasoline stocks were down 4.5 million barrels.