Oil futures: Brent slumps over 6% amid EU sanctions uncertainty

9 May 2022

Quantum Commodity Intelligence - Crude oil futures Monday came under strong selling pressure amid uncertainty over the EU’s timeline for phasing out Russian oil, while renewed dollar strength and extended lockdowns in China also weighed on markets.

Front-month July ICE Brent futures were trading at $105.20/b (1940 GMT), compared to Friday’s settle of $112.39/b and Monday trading range of $105.06-$113.20/b.

At the same time, June NYMEX WTI was trading $102.36/b, versus Friday’s settle of $109.77/b and well off from the day's high of $110.49/b just after the opening.

Talks between the bloc's 27 countries broke without a deal on Sunday, while further negotiations Monday failed to break the deadlock despite a number of compromises on the table. 

The EU had already revised the ban proposal to make it more manageable for countries heavily reliant on Russian oil, including Hungary, Slovakia, and the Czech Republic, while Bulgaria was also looking for an exemption.

“If these talks drag on, we could see some selling pressure returning to the market," said Warren Patterson, head of ING's commodity research, commenting at the start of Monday's trade and prior to the sharp sell-off.

Oil markets extended the losses during US trading hours as the S&P 500 retreated sharply, while the Dollar Index again hit multiyear highs of over 104 points, before easing back.

Traders continue to eye further signs of demand destruction as China pursues its zero-Covid policy. According to reports Monday, Shanghai was set to tighten mobility restrictions further in China’s commercial and industrial hub.

Meanwhile, G7 leaders, in a video conference call with Ukrainian President Volodymyr Zelensky, pledged additional measures against Moscow, including energy.

"We commit to phase out our dependency on Russian energy, including by phasing out or banning the import of Russian oil. We will ensure that we do so in a timely and orderly fashion," G7 leaders said in a joint statement.

Mike Muller, head of Asia at Vitol Group, told Sunday’s Gulf Intelligence energy markets podcast that Russian oil exports were set to drop further after the May 15 deadline when new restrictions kick in.

 “There will be a different reality,” said Muller. Under European Union financial sanctions against Russia, traders will no longer be able to buy oil from Rosneft after May 15 unless it is "strictly necessary" to secure the EU's energy needs.

Muller said that before the invasion, Russia was producing at its OPEC+ quota of 10.6 million bpd, of which 5.6 million bpd were refined domestically.

"Market consensus would seem to be that both of those numbers are down about 1 million bpd, which is a relative drop in the ocean compared to the intended impact of sanctions on Russia," Muller told Gulf Intelligence.

Saudi Arabia announced the expected steep cuts in June OSPs, including the flagship Arab Light grade, which was set at $4.40/b above the average of the Oman and Dubai benchmarks, compared to +$9.35 for May-loading crude.