WTI nearly hits $120 before fading back towards $118 amid cocktail of bullish drivers

A cocktail of bullish factors supported global oil prices on Tuesday, with front-month WTI futures coming within a whisker of hitting the $120 per barrel mark earlier in the session before backing off somewhat following a risk-averse start to the final trading day on Wall Street of the month. At current levels just above $118, WTI is still trading with gains of around $0.50, having on Monday broken above key support in the form of the late March highs in the $116s.

Market commentators cited expectations for rising demand in the coming months as North America and Europe enter the peak summer driving season plus positive developments regarding the Covid-19 situation in China (lockdown easing continues as new infections in the country fell back under 100 for the first time since early March). Probably the most important development underpinning prices right now, however, is the news early on Tuesday that EU 27 leaders came to an agreement on a Russian oil embargo.

Seaborne crude oil imports from Russia will be completely phased out within the next six months and, while oil delivered via pipeline is exempt from sanctions to placate land-locked Hungary, other EU nations that import a lot of Russian crude oil via pipeline have pledged to end purchases by the end of the year. In sum, the bloc will have phased out 90% of its purchases of Russian crude by the end of the year, a devasting blow to the Russian energy industry.

OPEC+ are scheduled to meet later in the week and sources on Monday said that, despite the EU’s (widely anticipated) ban on Russian oil imports, they would stick to their existing policy of steady 432K barrel per day increases in output quotas each month. The group's slow approach to increasing output at a time when many of its smaller producers are struggling to keep up and Russian output is collapsing from pre-Ukraine invasion levels has contributed to a significant tightening of global oil markets.

Highlighting this tightness, commodity analysts on Tuesday pointed to a continued steepening of the current contango of the oil futures curve. The premium to buy Brent crude futures for delivery in August versus six months later rose to a fresh nine-week high of near $15.