The big news on the oil market this week is the European ban on oil from Russia. Tensions mounted this week before the 27 EU member states finally reached an agreement. Russia also kept things busy on another front, at the OPEC+ meeting held yesterday (Thursday, June 2).
The listing of Brent crude oil has been steadily on the rise since May 18. This week, the price of Brent oil reached its tentative peak on Tuesday, May 31 at $122,84 a barrel. That is the highest price since March 8. In the second half of the week, the price fell slightly again to close today (Friday, June 3) at $117,42 a barrel. That is still well above the peaks in the market of the past two months.
The oil market summit this week was closely linked to EU sanctions on Russian oil supplies. After weeks of negotiations, the member states have finally reached an agreement. The import of crude oil from Russia by sea will be phased out completely in the next six months. For oil distillates, that period is eight months. About two thirds of the oil from Russia comes to the EU via ships. Hungary, Slovakia and the Czech Republic, which depend on oil from Russia for a significant part of their energy supply, may continue to import oil via the Druzhba pipeline. Germany and Poland, which also supply some of the oil through this pipeline, have committed to stop before the end of 2022. This effectively means 90% less Russian oil flows to the European market.
Ineffective
Several analysts have strongly criticized the composition of the European sanctions package. According to these experts, it is relatively easy to find another destination for the oil that is supplied by tankers. Russian oil - and with it the income for the state treasury - is not disappearing from the market, but is being used for another purpose. An important part of the Russian oil that was actually destined for the EU was already shipped to, for example, China and India, whether or not at a reduced rate. Traders and refiners in Europe meanwhile have to look for other suppliers. The effectiveness of the sanctions is thereby called into question. If the boycott were actually effective, there would have to be a shortage in the market. That means a higher oil price. That effect has not been forthcoming so far. Oil continues to be expensive, but the market has shown a clear correction since the European measures came into effect.
Opec provides a little surprise
Analysts eagerly awaited the OPEC+ meeting that took place yesterday (Thurs., June 2). There was a lot of speculation beforehand. According to some sources, the cartel was considering granting Russia an exemption from production quotas. This would give the country a comparable status to Venezuela, Iran and Libya, also countries that have difficulty entering the world market due to Western sanctions. Another factor is that Russia has been ramping up oil production in recent months.
Opec+ ultimately did not disclose anything about Russia, but the cartel has decided to increase oil production extra. In July and August, an additional 648.000 barrels of oil per day will be pumped instead of the 432.000 barrels originally planned. That's more than many analysts took into account.
Capacity problem
Unlike crude oil, the rise in the price of diesel has not yet come to an end. This week the diesel price rose to € 163,45 per 100 liters. That is the highest price since the beginning of May. In addition to the high oil price, processing capacity also plays a role, experts warn. Refining capacity has shrunk by 2020 million barrels per day since 2, according to data from the IEA. Despite the high oil and fuel prices, oil companies are very reluctant to invest in (new) refineries. It is a long and expensive process to build, expand or refurbish a facility. That will only happen if investors have confidence in the market in the long term. And that is currently lacking, partly due to the greening ambitions of the EU and the US, experts warn. However, it is too easy to put the blame solely on government and politics. Another factor in the business climate is that shareholders like to see a quick return on their investments. That makes it tempting for the oil industry to pay out a relatively large dividend and to buy up its own shares to keep the price level instead of making long-term investments.