WTI rallies into $106.00s, eyes recent highs near $110 with focus on EU’s proposed embargo on Russian oil

Oil prices have turned sharply higher this Wednesday in wake of a proposal by the European Commission to phase out all imports of Russian oil within six months, end imports of refined products by the end of the year and kick Russia’s top bank out of the SWIFT global payments system. EU nations will have to unanimously agree on the proposal for it to take effect and a few smaller nations (Hungary, Bulgaria, Slovakia) have been kicking up a fuss, meaning a final deal was not reached on Wednesday.

But envoys from each of the EU’s 27 nations will be meeting again on Thursday and the market's base case is that a deal will be finalised soon. The EU’s proposal will also ban EU companies from providing any shipping, financing or insurance services to aid the transport of Russian crude oil worldwide, a move analysts said would have a “chilling” effect on the global trade of Russian crude oil. Meanwhile, some have argued that once the EU has weened itself of Russian oil, the West will be able to up the pressure on countries still buying Russian crude oil grades, perhaps with the threat of sanctions.

As commodity markets brace for further declines in Russian oil output in the coming months as the EU’s latest sanctions take effect in the coming months, front-month WTI futures are trading firmly on the front foot. At current levels in the $106.00s per barrel, WTI is slightly more than $3.00 higher on the day, with oil prices for now shrugging off mixed news coming out of China regarding lockdowns there, as well as further evidence of global growth woes. WTI bulls are eyeing a test of recent highs in the $108-$110 area.  

Local press reported that Beijing is to extend lockdown measures indefinitely as the city continues to grapple with rising Covid-19 infection rates, however, the situation in Shanghai reportedly continues to improve, with much of the city now out of lockdown as case rates decline. The chilling impact on the global economy of recent Chinese lockdowns was on show on Wednesday with the release of IHS Markit’s global manufacturing PMI survey, which fell into contractionary territory for the first time since June 2020.

Looking ahead, official weekly US crude oil inventory figures will be released at 1530BST after private weekly API inventory data showed a larger than expected decline in headline crude oil stocks on Tuesday. This has arguably also supported the price action on Wednesday. Focus then turns to the broader macro theme of central bank tightening later in the US session, with the Fed seen delivering a 50 bps rate hike at 1900BST.

On Thursday, OPEC+ is scheduled to meet, with analysts expecting the meeting to be a non-event, with producers set to agree to continue their current policy of hiking output quotas by 400K barrels per day each month. The more important theme right now is how well OPEC+ nations can actually keep up with hikes to output quotas. Smaller nations have been struggling over the last 12 or so months, whilst sanctions mean Russia is also now a big under producer.