More Russia Sanctions Cause Oil to Rally, But Opinions Differ About Supply Tightness

Meanwhile, Iran again claims a nuclear deal with the U.S. is imminent: File image/Pixabay

The European Union promising new sanctions against Russia for alleged atrocities by its military in Ukraine was said to be the primary reason for oil rallying above $100 on Monday.

However, there are signs the tight global supply that has driven the commodity's upward trajectory of late is weakening.

After France on Monday said the EU will discuss sanctions on oil and coal and Germany said all economic ties with Russia must be severed as soon as possible, Brent jumped $3.14 to $107.53 per barrel; West Texas Intermediate settled up $4.01at $103.28 per barrel.

Vitol Group warned that oil prices could climb higher given the risk of supply disruption from Russia, but that it was still unclear exactly how many barrels have been lost.

Still, gains could be mitigated somewhat by the imminent emergency reserve draws of the U.S. and allies within the International Energy Agency: after both parties announced their intentions last week, the structure of the futures curve reportedly weakened, indicating that traders think supply could be less tight than initially feared.

Of the efficacy of the draws, Craig Erlam, senior market analyst at Oanda, said, "This is only a temporary solution, but offers a buffer over the next six months as producers ramp up production, including OPEC+ which has until now refused to accelerate its efforts in any significant way."

As for the tightness that is very much evident throughout Europe, Jonathan Leitch, an oil analyst at Turner, Mason & Co., said, "There is a clear financial incentive to increase crude runs; diesel is leading the way in terms of products that are in short supply."

Mark Williams, an oil products and refining analyst at Wood Mackenzie Ltd., added, "European refiners are sucking in West Texas Intermediate and drawing on short haul North Sea crudes to replace Urals spot barrels; more Middle East crudes will need to clear to Europe as EU refiners back out of Urals."

Also on Monday, Saudi Arabia's state oil producer Aramco raised its May selling price to Asia for its flagship Arab Light crude, and this prompted Phil Flynn, senior market analyst at Price Futures Group Inc., to remark, "That suggests demand for oil is still very strong, and by doing that it's going to drain oil supplies from the United States and make supplies tighter."

Meanwhile, a possible influence on oil trading this week could be Iran, whose officials on Monday once again stated that it's close to reaching an agreement with the U.S. amid stop-start talks to revive the nuclear accord between the two countries.