Why the price of oil is rising again

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 at themselves as part of a new round of sanctions against Russia after it 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 oil and refined 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 a barrel of Brent oil on this news jumped above $ 120, the highest level since March.

In principle, the decision is very significant. In addition to demonstrating the unity and willingness of the bloc 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 the most lucrative sources in Russia 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. For starters the ban only applies to marine 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.

A similar share in European imports from Russia is marine oil. But the ban is likely to have a limited impact on the oil market. Many tankers are already subject to “self-sanction” 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. Insurers based in Russia’s allies could partially replace them, but have smaller pockets.

The big question is whether the Russian sea oil that has come under sanctions will remain unsold. So far Russian oil exports grew even when the country came under sanctions. According to analysts at JPMorgan Chase, most of the increase 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 the opposition to 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 is partial, the oil market is so tense that prices have still jumped. Demand for fuel is high as the pandemic subsides and consumers begin ride and fly againand governments are trying to protect voters from the impact of higher energy costs. China’s weakening restrictions on coronavirus in recent days there has also been an added 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. The group was due to meet on June 2 when we went to the press, and was not expected to back down from its plan to gradually increase supplies to pre-pandemic levels (although prices have fallen due to reports that it is considering an exclusion plan Russia from its production targets, allowing Saudi Arabia and others to pump up more to make up for lost production).

Sincere supply and strong demand together lead to higher prices for consumers. What’s worse, America’s lack of oil refining capacity has raised gasoline and diesel prices even more than the price of oil. The growth of the dollar increases spending for Europe and developing countries, said Francisco Blanche of Bank of America. None of this is welcome news already an inflationary environment. According to data released on May 31, inflation in the euro area rose to 8.1% in the year to May, 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 hope that short-term pain for consumers will similarly change to long-term benefits from energy security.

Read more about our recent coverage Ukrainian crisis.

For exclusive understanding and reading recommendations from our correspondents in America, sign up for Checks and Balanceour weekly newsletter.

Source link