Oil Hits A Two-month High Due to Tight Supplies, And The EU Wants to Ban Russian Crude

On Thursday, oil prices rose almost 3 percent to a two-month high on concerns of tight supply ahead of the U.S. summer driving season, as the European Union (EU) squabbled with Hungary over plans to prohibit petroleum imports from Russia in response to its invasion of Ukraine.

Traders also observed that oil prices tracked a rise in equities and a weakening of the U.S. dollar versus a basket of currencies, which makes oil more affordable when purchased in other currencies. 

Brent (LCOc1) futures increased $3.37, or 3.0%, to $117.40 per barrel, while U.S. West Texas Intermediate (WTI) oil advanced $3.76, or 3.4%, to $114.09.

Brent reached its highest level since March 25 after six consecutive days of gains. WTI had its highest close since May 16.

Edward Moya, a senior market analyst at the data and analytics firm OANDA, said, "Crude prices increased because a tight oil market was expected to persist given that the start of the summer driving season would put U.S. stockpiles on a downward trend."

A significant weekly reduction in U.S. oil stocks, as announced on Wednesday, provided support for prices. 

"The underlying background... is becoming price supportive... and will become even more optimistic once all parties embrace EU sanctions on Russian oil sales," PVM Oil's Tamas Varga said.

President of the European Council Charles Michel is convinced that an agreement can be reached prior to the council's next meeting on May 30.

As EU penalties require unanimity of support, Hungary remains an obstacle. Hungary is requesting approximately 750 million euros ($800 million) to modernize its refineries and expand a Croatian pipeline.

Even in the absence of an official prohibition, there is significantly less Russian oil accessible since customers and trading houses have avoided purchasing from the country.

According to Deputy Prime Minister Alexander Novak, Russia's oil production should decrease to 480-500 million tonnes this year from 524 million tonnes in 2021, as reported by the state-run news agency RIA.

OPEC is expected to adhere to last year's agreement to increase July output targets by 432,000 barrels per day, six OPEC sources told Reuters, rebuffing Western calls for a faster increase to control prices. OPEC will meet on June 2 and is expected to adhere to last year's agreement to increase July output targets by 432,000 barrels per day.

Other factors also support the price of oil.

Sugandha Sachdeva, vice president of commodities research at Religare Broking, said, "Shanghai is set to reopen after a two-month lockdown, while the U.S. peak driving season begins with the Memorial Day weekend." On Monday, the United States observes Memorial Day.

The U.S. government seized an Iranian oil shipment held on a Russian-operated ship in Greece and will transport the shipment to the United States aboard a different vessel.

Britain, meanwhile, imposed a 25 percent windfall tax on the earnings of oil and gas firms, along with a $18.9 billion ($15 billion) support package for those struggling to pay their energy bills.

Hungary announced increased "excess earnings" taxes of 800 billion forints ($2.19 billion) on banks, energy industries, and other businesses.