Francis K. from Salem, OR asks: Hello Mitch, my question relates to recent news that Europe is banning Russian oil. This feels like big news that could disrupt oil prices and send gas prices even higher. Is this something we should prepare for?
Mitch’s Response:
Thank you for emailing your question. There was indeed some significant news coming from the European Union recently. A month or two ago, the idea of the EU banning Russian oil seemed like a far-off possibility, given the bloc’s reliance on Russian imports. But the ongoing war has changed the EU’s stance.1
In late May, the EU announced it would implement a ‘phased’ Russian oil ban, which will take place over the course of 2022. The EU will start by blocking all Russian crude and refined fuels that arrive on ships, with a carve-out for pipeline oil (to appease landlocked Hungary). Germany and Poland have pledged to stop buying oil that arrives via pipeline by the end of the year, however, which will effectively sanction 90% of Russian oil imports by the end of 2022. That’s pretty huge. The EU also took the bold step of blocking insurance companies from covering cargo ships carrying Russian oil, which is meaningful given that European insurers cover most of the world’s oil trade.
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Oil prices have already been moving sharply higher, given tight supplies caused by a resurgence of demand following global lockdowns – which was also when oil production fell off a cliff. Global oil markets also lost quite a bit of refining capacity during that time, which is one of the key drivers behind higher gas prices. With Russian oil increasingly coming off the market, global supplies stand to get even tighter, which would argue for crude oil prices remaining elevated for some time.
There are some supply/demand crosscurrents in the oil markets, however, that may help prices. Just days after the EU’s big announcement, the nations in OPEC+ reached an agreement to raise output by 648,000 barrels a day in July and August, which marks a 50% increase in production from previously announced plans. To be fair, just about every member of OPEC save for Saudi Arabia and the United Arab Emirates are already pumping at capacity, so these increased production targets are not necessarily the solution everyone is hoping for. The U.S. and Canada will also need to step-up production to fill the deficits in global oil supply, which is something we’re starting to see now.
As far as whether these issues in global oil markets will continue to affect gas prices, I would say the answer is yes – you should continue to prepare and budget for elevated gas prices this year. I think markets have largely priced all of the supply/demand issues facing the oil trade in 2022, absent some new positive or negative surprise. So, I do not envision oil and gas prices moving materially higher from the levels they are at now if that is any consolation. The world lost a major oil producer in Russia, and it takes time for new supply to come online to make up the deficit. The upshot – sort of – is that the pain of higher prices in the short term is also a motivation for producers to pump more, which should ease price pressures given some time.
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