- Oil rallied on Wednesday, after the EU unveiled a proposal to phase out Russian crude imports within six months.
- European Commission President Ursula von der Leyen said the aim is to ratchet up pressure on Moscow for its war in Ukraine.
- “Russian fossil fuels are soon going to be history for western Europe and its allies,” one analyst said.
Oil and natural gas prices soared in Europe on Wednesday, after the EU unveiled a long-awaited proposal that would phase out imports of Russian crude in six months.
EU Commission President Ursula von der Leyen said this latest round of sanctions will include a complete import ban on all Russian oil, which covers both crude and refined products. It would affect all shipments, both seaborne and via pipeline.
Brent crude futures jumped 3.25% on the day to $108.39 a barrel. The oil price has risen nearly 40% so far in 2022, topping $100 a barrel for the first time in years, driven in part by the prospect of direct sanctions on Russia’s energy sector.
The EU, which in 2021 relied on Russia for about 25% of its oil and 40% of its natural gas, has been under intense pressure to stop imports of crude as a means of cutting off financing for Moscow’s war in Ukraine.
“While an oil embargo still hasn’t been officially voted through, it is very, very clear that it is only one way forward for the EU (and its allies) — and that is full exit from Russian energy,” SEB’s head of commodity strategy, Bjarne Schieldrop, said.
“Russian fossil fuels are soon going to be history for western Europe and its allies,” he said.
Von der Leyen said Wednesday the oil will be phased out in an orderly fashion, giving member states enough time to find alternative supply and with minimal disruption to global energy markets.
“This is why we will phase out Russian supply of crude oil within six months, and refined products by the end of the year,” she said in a speech to the European Parliament. “Thus, we maximize pressure on Russia, while at the same time minimizing collateral damage to us and our partners around the globe.”
Russia produces some 11 million barrels of crude a day — roughly equal to 10% of total world daily output. It exports around 7 million barrels a day, and Europe buys more than half of that, according to the US Energy Information Administration. About two-thirds of the supplies arrive by ship, and the remaining one-third by pipelines stretching thousands of miles across the continent.
Since its invasion of Ukraine in late February, Russia has been the target of punitive sanctions, particularly from Western nations. But its huge energy sector had mostly escaped unscathed, save for import bans from countries like the US and UK, which buy very little in the way of Russian oil, natural gas or coal.
The market has been losing about 1 million barrels of Russian oil a day in April from traders shunning cargoes, analysts assume, and existing EU sanctions already restricted purchases of Russian crude to only those “strictly necessary” from May 15. BP boss Brian Looney on Tuesday said he expected an additional 1 million barrels a day to vanish on top of that in May.
A trickier issue will be replacing Russian refined product imports, particularly so-called middle distillates. These include fuels such as diesel, fuel oil that runs heavy-duty vehicles and machinery, and inputs for petrochemicals.
“The middle distillate market is extremely tight in most regions around the globe. Risks around Russian supply, lower Chinese exports, recovering demand following Covid, and limited ability of refiners to respond has meant that inventories in the US, Europe and Asia are at multiyear lows,” ING strategist Warren Patterson said.
Natural gas is a far less likely target for restrictions, not least because of the EU’s dependence on it. But the relationship is mutual. According to EIA data, the bloc takes 89% of all Russia’s gas exports.
Even though gas is immune for now, benchmark European prices have shot up by 50% this year alone. Dutch gas futures were up 5.35% on the day at 104.75 euros per megawatt hour.
Reports citing EU sources said Hungary and Slovakia, which are reliant on the imports, will get longer to phase out purchases of Russian crude oil. They will be able to keep buying under existing contracts until the end of 2023, Reuters reported, while the Wall Street Journal said they will have a 20-month phaseout.