EU’s likely ban on Russian imports weigh on investors’ sentiment

Volatility continues to dominate the oil market as investors closely monitor the EU proposal to ban imports of Russian oil. The situation has added to the uncertainty, which continues to weigh on investors’ sentiment.

The oil market structure strengthened as worries about tightening refined oil product markets pushed front-month contracts higher compared to forward contracts.

Elevated oil futures' volatility, equity market selloffs, and clouded oil supply and demand outlooks amid persistent geopolitical tensions and COVID-19 lockdowns in China continued to reduce investors’ risk appetite and keep some of them out the market

Oil prices averaged higher, mainly driven by signs of tightening global oil product markets, specifically in the US, and a surge in US gasoline futures, which supported West Texas Intermediate futures compared to Brent.

Data showing a sharp fall in Russian diesel exports in April, and a new large drop in the US gasoline stocks last week according to EIA data, also added support.

Most product prices recovered to pre-pandemic levels and continued to climb thereafter to ultimately reach new record highs in March.

The global gasoline complex is heading into a strong summer and the gasoil-gasoline premium should narrow sharply in the months ahead.

Global gasoline demand is set to surge by 1.3 million barrels per day to average 26.3 million bpd during June-August, compared with 25 million bpd in January-April.

Refinery margins rallied to an unprecedented record-breaking highs in April, as a progressive contraction in product inventories drove fuel prices to a much greater price appreciation relative to that seen in crude oil, which led to a widening product vs. crude price spread.

The fuel price hike was a result of several product supply-side constraints registered on a global scale since the start of the COVID-19 outbreak.

This includes refinery closures, unplanned shutdowns due to bad weather and pipeline disruptions due to cyberattacks.

Additionally, there have been run cuts due to poor economics, as refiners became more cautious in ramping up their intake to safeguard margins and avoid the financial losses suffered in 2020, reduced product exports from China, and most recently, the spring refinery maintenance season, all of which have led to the hike in product prices manifested in all regions.

The price response has been more pronounced in Europe, where pressure from product flow adjustments due to the geopolitical situation High margins mean that refiners will run as much as possible to capture gains, which could eventually de-pressurize fuel prices and ultimately support product consumption.

Going forward, rising product supplies as the refinery maintenance season comes to an end should provide partial relief to fuel inventories and a slight decline in fuel prices.

Nevertheless, the severity of product tightness amid the onset of summer season and its subsequent pickup in transportation fuel consumption, will likely keep fuel prices and margins well supported beyond summer

Tightening gasoline and diesel markets ahead of the summer driving season are expected to continue supporting the oil complex in the coming weeks. A potential EU ban on Russian oil imports will further tighten the oil product market in the Atlantic Basin.

Russian crude output is estimated at 9.3 million barrels per day in the first half of May, while oil exports averaged 5 million barrels per day over the same period, down 0.4 million barrels per day from April, as buyers in Germany and Poland reduced their offtake.

Light and medium sweet crude differentials are expected to strengthen further as global diesel and gasoline markets are tight and demand for these products is rising.

Narrowing the Brent-WTI futures spread could raise US export volatility, though exports to Europe are expected to remain above last year's level as countries try to replace Russian crude oil imports.

Global demand for jet fuel is recovering at a geographically uneven pace as global aviation continues to improve with the reopening of international travel.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.