Why oil came back above $ 120 a barrel

I.n 1970s Arab states have used the embargo’s “oil weapons” to punish Western governments for supporting Israel. May 30 chapters of the 27th century es Member governments have agreed to direct weapons against themselves as part of the latest round of sanctions against Russia following its invasion of Ukraine. And cut off from Sberbank, Russia’s largest bank fast cross-border payment system, the package will also ban the purchase of Russian crude oil and petroleum products, such as diesel, until the end of the year. There would be es said to be a “temporary” release for oil supplied through pipelines. The price of Brent oil has risen above $ 120 per barrel – the highest level since March.

In principle, the decision is very significant. In addition to demonstrating unity and the bloc’s willingness to endure economic pain to punish Russia, it is severing one of the few remaining trade ties with the Kremlin. It also threatens one of Russia’s most lucrative sources of foreign exchange earnings. The es is the largest oil market in Russia, buying about half of the country’s oil exports.

However, there are reasons to be skeptical that the move will deprive the Kremlin of a significant amount of foreign currency. First, the embargo only applies to offshore oil transported by tankers. This is the price of unity: with the exception of oil supplied through pipelines, it was necessary to find a compromise with Hungary, which at the same time is more sympathetic to Russia than most es countries and critically dependent on the Soviet-era Druzhba pipeline (the name means “friendship” in Russian). Hungary imports about 65% of its oil from Russia.

Sea oil accounts for the same share of European imports from Russia. But the ban is likely to have a limited impact on the oil market. Many tankers are already subject to so-called self-sanctions in some parts of the West. Dockers refuse to unload ships carrying Russian cargo, and oil companies are concerned about the damage to their reputation from receiving cargo. Western financiers are moving away from writing insurance contracts. Although marine insurers based in Russia’s allies can partially replace them, they have much smaller pockets.

The big question is whether the Russian sea oil that has come under sanctions will remain unsold. So far, Russian oil exports have increased, even if the country has come under sanctions. According to analysts at JPMorgan Chase, Russian oil exports have risen since the invasion of Ukraine. Most went to India, which did not impose its own sanctions.

Another question is whether Europe will eventually ban the supply of Russian oil, which is harder to redirect to other countries. Poland and Germany have announced that they will stop importing the Druzhba pipeline. However, it is hard to imagine Hungary abandoning a broader ban. Victor Orban, the prime minister of the populist country, has shown readiness to block es making earlier. Due to a significant discount on Russian oil – the Urals benchmark is much lower than Brent—molHungarian oil group, reports a “sky-high” margin.

Although the embargo may be partial, the oil market is so tight that prices are still jumping. Demand for fuel becomes stronger as the pandemic subsides and consumers begin to travel and fly again, and governments take steps to protect voters from the impact of higher energy costs. China’s easing of restrictions on coronavirus in recent days has also added to the thirst for oil. Prices for industrial metals, including iron ore and copper, also rose.

Meanwhile, the Organization of the Petroleum Exporting Countries (APEC) and its allies, including Russia, have not yet shown signs of increased production. It is expected that at the meeting on June 2, the group will not announce any changes in its plans to gradually increase supplies to levels observed before the pandemic (although it is reportedly considering a plan to exclude Russia from production, allowing Saudi Arabia and others inflate more to offset any cuts in Russia).

Combining tough supply and increased demand, and the consequence for consumers in the pump is higher prices. What’s worse, the lack of refinery capacity in America has raised gasoline and diesel prices even more than the price of oil. Francisco Blanche of the Bank of America notes that the growth of the dollar increases costs for Europe and emerging markets. None of this is welcome news in the face of already inflation. For example, according to data released on May 31, inflation in the euro area for the year to May rose to 8.1%, which is higher than economists expected.

The Arab embargo of the 1970s brought the West short-term pain, but also spurred a drive for fuel efficiency, which ultimately reduced dependence on oil. Today’s European governments can also hope that short-term pain for consumers is worth the long-term benefits of energy security.

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