EU embargo, Isch is "on the lever", what is the impact on the crude oil market?

May 29, 2024, 11:58 AM

TDD-global

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Yang Jiaming from CITIC Futures analyzes the EU's decision to ban 75% of Russian oil imports, escalating to a 90% embargo by year-end. The immediate effects include a significant drop in oil supply, driving prices higher. Geopolitical tensions, particularly between Iran and Greece, further complicate the crude oil market, with concerns over supply shortages during the peak summer demand season. The potential for rising inflation and economic impacts in the EU is also discussed.

Yang Jiaming, an analyst at CITIC Futures, said that according to the current agreement reached by EU member states, the import of about 75% of Russian oil will be banned immediately. Poland and Germany will stop buying pipeline oil from Russia until the end of this year, when the EU oil embargo will cover about 90 percent of Russian oil imports. About 10% of the EU's oil imports from Russia are temporarily exempted, including pipeline oil imported from Russia by Hungary, Slovakia, and the Czech Republic. These countries are difficult to obtain alternative oil resources in the short term.

"If 75% of the pipeline transportation is stopped immediately according to the agreement, it is equivalent to a loss of 2.55 million barrels per day of oil supply, which will expand to 3.06 million barrels per day before the end of the year, which will have a greater impact on crude oil, diesel and high-sulfur fuel oil. The direct drive of the sharp rise in oil prices in the two trading days. From the perspective of market performance, the market believes that the EU's suspension of Russia's seaborne oil imports depends on imports from other countries (seaborne), which intensifies the tension between supply and demand in the oil market. From the perspective of resource replenishment Look, the United States, OPEC, even Iran and Venezuela can completely replace Russia's seaborne oil resources, but the market needs to see the increase in production in the above areas and the rapid realization of the Iran nuclear agreement, and the market will be worried about the tight supply and demand in the oil market. Relieve." Yang Jiaming said.

In addition to the EU embargo, the conflict between Iran and Greece has made the crude oil market even worse.

Greece detained a Russian tanker carrying Iranian crude in April and will hand over the oil to the United States. Iran was strongly dissatisfied with this and quickly took countermeasures: Iranâ€™s Islamic Revolutionary Guard Corps issued a statement on the 27th saying that two Greek oil tankers were detained in the Persian Gulf waters that day due to violation of relevant laws.

Iranian Foreign Ministry spokesman Khatibzad said on Twitter that the relationship between the two countries "has always been based on mutual respect" and must not be hindered by serious short-sighted misjudgments, including "directed by a third party". Robbery". Iran's Tasnim news agency warned on the same day, citing anonymous sources, that if Greece "continues to engage in malicious actions", Iran's Islamic Revolutionary Guard Corps may detain another 17 Greek ships sailing in the Persian Gulf.

Marine tanker monitoring data shows that there are at least a dozen Greek tankers in the waters near Iran, and Greece is a major shipping country, with nearly a quarter of the world's tankers sailing under the Greek flag. In March-May 2022, Greek tankers accounted for about 60% of the total capacity of tankers exporting oil from Russia, compared to about 33% in the same period in 2021. In addition, the Strait of Hormuz, which separates Iran from the Gulf countries, is also an important sea area for oil trade, and the daily oil trade through the strait accounts for about one-third of the global maritime oil trade.

Zheng Mengqi told reporters that the main reason behind this incident is still the conflict between Russia and Ukraine. If the European Union proposes to ban the seaborne Russian oil, and the United States supports the seizure of tankers, Russian crude oil exports will fall sharply. As far as Iran itself is concerned, the current market is more focused on whether the Iran nuclear agreement can be reached, so that Iranian crude oil can return to the international market to make up for the gap caused by the Russian oil embargo. After the U.S. withdrew from the Iran nuclear deal, Iran also had a tanker seizure incident with the United Kingdom. The incident ended with the mutual release of each otherâ€™s ships. The oil tanker incident at that time only pushed up geopolitical risks for a short period of time. The issue of the mutual seizure of oil tankers between Greece and Iran this time requires more attention to whether the United States and Russia will further magnify the matter.

The summer is about to enter the peak season for crude oil demand. Will Iran and Greece retaliating against each other will further tighten the already insufficient crude oil supply and push up oil prices?

Zheng Mengqi believes that the fundamentals of the current crude oil market are strong. Summer is the peak season for gasoline consumption in the United States. Gasoline prices are at historically high levels, and cracking remains strong. The domestic epidemic blockade measures are gradually lifted, and demand will gradually improve. If Russia's oil embargo sanctions are implemented, in the peak demand season and high cracking conditions, the supply and demand gap between Europe and the United States will widen, superimposed low inventory levels, and strong support below the oil price, which is easy to rise and difficult to fall.

"With the news of the embargo being announced, the bulls have been realized, and oil prices have risen sharply. The market may gradually find further drivers, such as whether Europe can see supply from other sources increase, whether European crude oil demand is suppressed by high prices, and whether high inflation can trigger the EU. Before the global recession, etc. I think the high inflation caused by high oil prices and high gas prices is enough to turn the interest rate policy in Europe, and the European industrial climate index continues to decline, the economic growth rate is a high probability event, and the ten bond yields of EU countries Signals such as rising may imply that the EU has fallen into recession before other countries. The embargo event will lead the EU to rely more on seaborne oil imports, and the freight distance will increase, and the cost of oil will further increase and increase the risk of inflation. At present, the bullishness is realized and the bearishness is less than expected. Given the situation, oil prices are strong, and in the future, we need to see the gradual return of supply, a sharp slowdown in economic growth or even a recession in order to substantially suppress oil prices." Yang Jiaming said.

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