OIL PRICE OUTLOOK: BULLISH
- Oil rallies for the week on supply concerns
- Reports that Europe will soon present a plan to cut off Russian oil imports may be seen as a positive catalyst for energy markets
- Declining chances of reinstating the 2015 JCPOA nuclear deal will also support WTI and Brent prices
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Oil prices notched solid gains this past week, with WTI and Brent up more than 3% to $105.7 and $109.0 respectively during the last five trading sessions. Although slowing world economic activity and the current lockdowns in China to contain the spread of COVID-19 raised concerns about near-term demand prospects for fossil fuels, those fears were counterbalanced by mounting worries that global supplies will become tighter due to the possibility that Europe could impose an embargo on Russian petroleum. Speculations that Brussels could soon pull the trigger and advance one of the most contested measures to punish the Kremlin for its invasion of Ukraine intensified in recent days following reports that Germany has dropped its opposition to the controversial sanction.
Details are still scarce, but the plan to cut off Russian oil imports may be gradual and come with a transition period so that the bloc has enough time to secure alternative sources of energy. There will likely be more information on the mechanics of the ban the coming days, but with the French presidential election in the rearview mirror and the green light from Berlin, the expectation is that the formal proposal will be put forward for debate and approval in early May.
The European Union imports between 3.1 and 3.4 million barrels of crude and refined products daily from Russia, about a quarter of its energy needs, remitting to Putin’s government more than $375 million a day in payments – funds that the regime uses to finance its military assault on Ukraine. Although a small portion of Russian oil has already been sidelined following the outbreak of war, a phased-in embargo may further reduce global supplies in the short term, putting upward pressure on both Brent and WTI.
Another variable that can act as a positive catalyst for energy commodities is the stalled negotiations between Iran and the United States to revive the 2015 JCPOA nuclear deal. A few months ago, investors were fairly confident that the two sides would reach an agreement by the summer, allowing Iranian oil exports to return to the international market. However, the situation has changed in recent weeks due to a major stumbling block: Tehran's unwavering demand that the U.S. government remove the terrorist designation from the Islamic Revolutionary Guard Corps (IRGC), a branch of the Iranian Armed Forces.
The politics of such a move are toxic in Washington right now and limit the White House's room for maneuver. For instance, if President Biden were to relent and agree to drop the IRGC's terrorist label in order to get a deal done, at a time when his approval ratings are already plummeting, the opposition could use the issue as another talking point about foreign policy failure, complicating the Democrats' hopes of maintaining their narrow majority in Congress after the November midterm elections. Against this backdrop, the chances of the JCPOA being reinstated in the near term have diminished, bolstering the bullish outlook for oil.
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---Written by Diego Colman, Market Strategist & Contributor
