WTI briefly hits more than one-month highs above $110 with focus on EU’s Russian oil embargo and OPEC+

Oil prices rallied for a second straight session on Thursday, with front-month WTI futures briefly hitting their highest levels in more than one month above the $110 ber barrel mark before more recently pulling back closer to $109. At current levels, WTI is still more than $1.50 higher on the day. Market commentators cited concerns about a further drop in Russian output in the months ahead as the EU nears agreement on a plan that would phase out all Russian oil imports within six months.

A French official on Thursday said they were confident a deal would be reached by the end of the week, with the EU proposal facing pushback from the likes of Hungary, Slovakia and Bulgaria. Market commentators also cited OPEC+’s decision on Thursday to continue their current policy of raising output quotas by 432K barrels per day each month as supportive for the crude oil complex. OPEC+ has been under pressure by major oil-consuming nations to increase output at a faster pace.

Even before Russia’s invasion of Ukraine and the subsequent harsh Western sanctions response, the outlook for near-term OPEC+ supply increases was poor, with a number of the group’s smaller producers struggling to keep pace with output quota hikes. A recent Reuters survey revealed the group’s adherence to its supply cut pact stood at over 160% last month and this is expected to rise as Russian production further suffers in the months ahead.

“The oil market has not fully priced in the potential of an EU oil embargo, so higher crude prices are to be expected in the summer months if it's voted into law,” an analyst at Rysted Energy said on Thursday. “The planned EU oil embargo represents a massive logistical challenge for oil markets,” another analyst said.

For now, then, WTI prices above/around $110 seem to make sense and bears will be eyeing a potential test of late March highs in the $116s. But traders would do well to also remain cognizant of downside risks presented by the evolving lockdown situation in China, with the country still pursuing a zero covid strategy. Beijing continues to struggle to contain a Covid-19 outbreak and has been extending restrictions as infection rates (though still low) continue to rise. Local press suggests that the situation in Shanghai has been improving, however.