Prices of crude oil further soared on Tuesday, May 31 after the leaders of the European Union (EU) countries reached an agreement to ban 90 per cent of Russian energy imports by the end of the year.
The European bloc took the step to cut oil imports from Russia because it is a vital source of funding for the country’s invasion of Ukraine. This was reached after a compromise deal with Hungary.
This action sent the Brent crude higher by $1.17 or 0.96 per cent to $122.80 per barrel and raised the West Texas Intermediate (WTI) crude higher by 37 cents or 0.32 per cent to $115.40 per barrel.
The 27-nation organisation has spent weeks haggling over a complete ban on Russian oil but encountered stubborn resistance from Hungarian Prime Minister, Mr Viktor Orban, who said an embargo would destroy his country’s economy.
The head of the EU’s executive, Ms Ursula von der Leyen, said the move “will effectively cut around 90 per cent of oil imports from Russia to the EU by the end of the year” when Germany and Poland have promised to end deliveries via pipeline.
Two-thirds of the Russian oil imported into the EU is delivered by tanker and one third by the Druzhba pipeline. The embargo would reach 90 per cent after Poland and Germany, which are also connected to the pipeline, stop taking delivery of Russian oil by the end of the year.
The sanction will indeed constrict an already tight market and this will push the prices of the black gold higher.
It is not known if the move will force the hand of the Organisation of the Petroleum Exporting Countries and allies (OPEC+) to ramp up its production agreement which was put in place to reduce the amount of oil flowing around the world.
Yet, OPEC+ is expected to stick to its original plan of a modest increase of 432,000 barrels a day for July when it meets on Thursday.
According to a report from the Wall Street Journal, some members of the cartel are mulling over the possibility of suspending Russia from the OPEC+ deal.
This could be a game-changer as the alliance has always refused to do anything about its ally following the invasion of Ukraine more than three months ago.
If Russia is removed from the equation, it could allow other members to increase oil production at a quicker pace but there are only a few OPEC members believed to have the capacity to ramp up production as quickly as the current deal allows.
Russia will now look to Asia, particularly China and India, which increased their imports of Russian crude.