Energy

There has been little progress in the EU’s proposed oil embargo against Russia. The European Commission and other member countries have failed to convince the Hungarian government to back the ban. Instead, the Hungarians have said that they would only support the ban if there is an exemption for Russian pipeline oil flows.

If we were to see this, it would significantly water down the impact of the ban, given that the Druzhba pipeline flows amount to somewhere in the region of 1MMbbls/d, which is a significant portion of the roughly 2.3MMbbls/d of crude oil that the EU imported from Russia in 2021. Given the large volumes of Russian pipeline oil coming to the EU, it is hard to see an exemption on pipeline flows as an acceptable compromise. The longer these talks drag on, the more pressure there could be on EU member countries to impose a ban on a national level, rather than waiting for all EU members to finally come to an agreement.

The EIA’s weekly oil report showed that US commercial crude oil inventories increased by 8.49MMbbls over the last week. However, SPR inventories declined by 6.99MMbbls, which means that total US crude oil inventories increased by a more modest 1.5MMbbls. Crude oil exports declined by 695Mbbls/d over the period, helping the build seen in inventories.

However, the refined products market continues to tighten up. Despite refiners increasing operating rates over the week, gasoline inventories declined by 3.61MMbbls, which saw stocks falling below the 5-year range. Tighter gasoline stocks as we move into the driving season should be supportive of gasoline cracks. Distillate fuel oil inventories also declined, although fell by a more modest 913Mbbls. However, total US distillate stocks are at their lowest levels since 2005, whilst if we look to the US East Coast, inventories are at their lowest levels since at least 1990. The continued tightening in middle distillates and the risk around Russian gasoil exports suggest that middle distillate cracks could see some more strength.

Finally, OPEC and the IEA will release their monthly oil market reports today, which will include their latest outlook on the market. It will be interesting to see what supply revisions both agencies have made, if any, given the EU’s proposed ban on Russian oil. In addition, there is the potential for further demand downgrades, particularly from OPEC, given that they have made much more modest downward revisions up until now.