Oil posts monthly gains on likelihood of European sanctions on Russian energy exports

Brent and WTI continued to trade above $100 per barrel

Oil pump jacks in Russia. The EU is considering banning the country's energy exports. Reuters

Oil edged lower on Friday but posted gains for the fifth month in a row on supply concerns due to Russia’s military offensive in Ukraine and the growing possibility of European sanctions on Moscow’s energy exports.

Brent, the global benchmark for two thirds of the world's oil, settled 0.11 per cent lower at $107.10 a barrel at the close of trading on Friday. West Texas Intermediate, the gauge that tracks US crude, closed down 0.64 per cent at $104.70 a barrel.

Both Brent and WTI rose for the week and posted their fifth straight monthly gain, with Brent ending the month 1.3 per cent higher and WTI surging 4.4 per cent during the period.

There is an increased possibility of Germany joining other EU nations in imposing sanctions on Russian oil exports as Moscow's military offensive in Ukraine continues.

Germany’s Economy Minister Robert Habeck has said the country can cope with an EU embargo on Russian oil imports. Europe’s biggest economy is hoping to find alternative sources of supply soon.

The EU's move to consider sanctions on Russian imports comes after Russia halted natural gas supplies to Poland and Bulgaria last week.

The bloc has accused Russia of weaponising its energy supply.

Russia is the world's second-largest energy exporter. It accounts for about 10 per cent of the world’s energy output, including 17 per cent of its natural gas and 12 per cent of its oil. The US and UK have already banned Russian oil imports.

From May onwards, close to 3 million barrels per day of Russian production could be offline due to international sanctions and the widening of customer-driven embargo comes into full force, according to the International Energy Agency.

Oil markets are having a “wax-on, wax-off” week as they bounce between China slowdown fears and European energy bans, said Jeffrey Halley, a senior market analyst for the Asia-Pacific region at Oanda.

“I believe there has been far too much complacency of late around the risks associated with either Russia or Europe imposing respective energy bans, or developments in the Ukraine war.”

Although there are signs of a significant shift in Europe, “markets remain in a holding pattern until a clear policy response from the EU emerges with respect to their stance on importing Russian oil”, said Daniel Richards, Mena economist at Emirates NBD.

Oil prices declined in recent weeks amid concerns about the demand outlook and co-ordinated efforts by the US and the International Energy Agency to improve supply.

Crude prices, which rose close to $140 a barrel in March on developments related to the Ukraine conflict, have given up most gains.

However, Europe’s sudden scramble for alternative energy supplies will “offset China's slowdown fears and send prices higher”, said Mr Halley.

China, the world’s second-largest economy and biggest crude importer, is experiencing a wave of Covid-19 infections and has introduced strict movement curbs in major cities such as Shanghai and the capital, Beijing, as part of its “zero-Covid” strategy.

There are currently no signs that the country is willing to ease movement restrictions that are slowing its economic growth momentum and piling pressure on already strained global supply chains.

Last month, the IEA cut its demand forecast for 2022 due to Covid-19 lockdowns in China and weaker-than-expected demand growth in advanced economies, especially the US.

Demand for the year has been lowered by 260,000 barrels per day from last month's projection to 99.4 million bpd for 2022, the Paris-based agency said.

Opec, representing some of the world’s top oil producers, also lowered its supply and demand forecasts, in its monthly market report, over concerns that the Russia-Ukraine war and lockdowns in China could stymie consumption.