The European Union’s “partial oil ban” on Russia has affected the whole body.
In the middle of the night on May 30, local time, the European Union announced that the leaders of the EU member states had reached an agreement on an immediate partial ban on the import of Russian oil. After the EU statement was released, Brent oil rose above $120 a barrel, hitting a new high in nearly two months.
Image source: Yingwei Caiqing
The embargo on Russian oil has raised concerns about the European economy as Europe is the largest buyer of Russian energy and several members of the euro zone are highly dependent on Russian energy. Fitch chief economist Brian Coulton pointed out in a research report to the “Daily Economic News” reporter, “(The European Union) suddenly embargoed Russian oil, the risk is very high and is fast. rise.”
The EU’s “partial oil ban” against Russia affects not only Europe. On May 31, local time, Fatih Birol, executive director of the International Energy Agency, said in an interview with the media that Russia is the cornerstone of the global energy system. At the same time facing the triple crisis of oil, gas and electricity.
“A rise in crude oil prices will inevitably fuel inflation concerns in the wider market and reignite concerns that central bank monetary policy is still lagging behind the broader trend. This means that global financial conditions could tighten again. If oil prices persist A breakout to the upside could undermine investor confidence,” Derek Halpenny, head of global market research at MUFG, said in an email to every reporter for comment.
What is the cost of the EU’s “partial oil ban”?
Late on the night of May 30 local time in Brussels, European Council President Michel announced on social media that the EU has reached a consensus on imposing an oil embargo on Russia, which will immediately cover 2/3 of the EU’s oil imports from Russia. However, it should be noted that this time the agreement reached a “shrinked version”. The oil embargo will cover oil and petroleum products, but will exempt crude oil that is piped to Hungary, Slovakia and the Czech Republic.
European Commission President Ursula von der Leyen said the sanctions would “effectively reduce” EU oil imports from Russia by 90 percent by the end of this year. Although mainly aimed at sea transportation, pipeline transportation has not been included, but it still makes the already tight European energy market worse.
Birol believes the current energy crisis will be bigger and longer than the crises of the 1970s and 1980s. He said that with the arrival of the summer, there may be a fuel shortage crisis in the United States and Europe, and people will find that diesel, gasoline and kerosene are in short supply at the same time, especially in Europe, because Europe not only depends on imports for crude oil, but also on petroleum products. import.
Bryan Colton pointed out in a report to every reporter that although the EU’s announced maritime embargo on Russian oil will be implemented in stages, as the Russian-Ukrainian conflict continues, the risk of a sudden embargo on Russian oil is very high. Large and rapidly rising. “Furthermore, Europe is very exposed to Russian oil, so a recession in Europe may be hard to avoid in this case.”
According to Brian Colton’s team’s forecast in March this year, economic growth in the euro area and Germany is about 2% in 2023, but recent data has shown downside risks. “Rising inflation could also magnify the impact on the economy by reducing real household income, with the euro zone likely to slip into recession in late 2022 or early 2023.”
According to data released by Eurostat on May 31, due to the conflict between Russia and Ukraine, the energy market continued to be turbulent and food prices soared. In May, the euro zone inflation reached an annual rate of 8.1%, a record high. Core inflation, which strips out energy, food and alcohol and tobacco prices, also rose to 3.8% from 3.5% in April.
In addition, refineries with a capacity of about 1 million barrels per day in the United States have been permanently closed, and some refineries have chosen to convert into biofuel production bases, which has led to a significant increase in both fuel prices and electricity prices in the United States recently. Globally, refinery capacity is also strained, especially as Western buyers (including the U.S.) no longer import Russian vacuum gas oil (VGO) and other intermediate products needed to refine crude into gasoline, diesel and jet fuel after.
JPMorgan Chase recently warned that with the start of the peak summer holiday season in the United States, the retail price of gasoline in the United States may reach $6.2 per gallon in August, up another 50% from the current level, and will not see a sharp drop in oil prices before the end of the year. Meanwhile, the average U.S. electricity price has risen 6.1 percent over the past year, according to the U.S. Environmental Investigation Agency.
Rising energy pushes up inflation, where will the global economy go?
Image source: Photo Network-501522339
As soon as the news of the “oil ban” came out, Brent oil rose above $120 per barrel, a new high in nearly two months.
In this regard, Derek Halpenny pointed out to the “Daily Economic News” reporter in an email interview that the rise in crude oil prices will inevitably exacerbate inflation concerns in the wider market and reignite people’s concerns about the monetary policies of major central banks. Concerns that are still lagging behind the broader trend. “This means that global financial conditions may tighten again. If oil prices continue to break upwards, it may undermine investor confidence.”
Francisco Blanch, head of global commodities and derivatives at Bank of America, said in a recently released research note that while the Russian-Ukrainian conflict has exacerbated problems in the global energy market, supply problems in the energy market already exist. For some time, developments could lead to further increases in energy prices. He pointed out, “At the heart of the supply problem in the oil market is the change in the supply elasticity of oil prices. In general, the number of rigs in non-OPEC countries has not responded to the increase in global oil prices as in the past. The end result is that in the face of Negative supply shocks, energy prices now have to rise even more to balance supply and demand in the market.”
“Given our current target price of $120/bbl for Brent, we think a sharp contraction in Russian oil exports could trigger a full-blown 1980s-style oil crisis and push Brent well above $150 / barrel level,” Blanche added in the report.
The oil crisis in the 1980s, also known as the second oil crisis, was one of the three major oil crises in the second half of the 20th century. At that time, crude oil prices rose from around $15/barrel in 1979 to as high as $39/barrel in February 1981. On the other hand, the market’s psychological expectations also played an important role in promoting. In 1978, the Rockefeller Foundation stated in a report that “the world will gradually experience a long-term tension in oil, even a serious shortage”, which made the market’s expectation of rising oil prices continue to heat up.
Francisco Blanche also warned in a research note that rising energy prices and an EU embargo on some Russian oil could lead to a global recession. “Global oil production is unlikely to rise significantly (in the short term) due to Russia’s energy supply issues and other issues including weak oil investment. The EU embargo on Russian oil will further exacerbate the situation.”
He believes that global economic growth is closely related to energy demand, and the current position of energy stocks is very low, and the ratio of crude oil inventories / usage is also near an all-time low. “Therefore, if the global economy is to continue to grow, the supply of energy must increase.”
Blanche believes that the global economy will continue to rely on energy to expand, even though the correlation between global GDP and oil markets has declined compared to 40 years ago. “In the past, we used to measure GDP by car sales, air trips, or the number of new data centers built in a given year,” he noted. “Without energy, no major economy will be able to expand. In our view, no matter what It doesn’t matter if the source of this energy is thermal or renewable, as long as it’s available.”
In addition, Blanche predicted in the research report that global oil demand in 2023 will be close to the level before the outbreak of the new crown pneumonia, but the premise is that Russia’s crude oil and condensate production remains at 10 million barrels per day, and OPEC+ crude oil Production increases.
The “Daily Economic News” reporter noted that, unlike the pessimistic forecast of Bank of America, Goldman Sachs believes that there will be no recession in the global economy. Goldman Sachs chief economist Jan Hatzius said in a report on Tuesday, “While our forecast for global economic growth has been below consensus for a long time, we believe that barring a new negative shock, the economy will be vulnerable this year. Fears of declining activity will ultimately prove redundant.”
Source of cover image: Photo Network-501522339
