Crude oil futures extend gains after overnight surge on EU ban on Russian oil

Crude oil futures were higher in mid-morning Asian trade May 5, extending strong gains from the overnight session as sentiment remained bullish after the EU said that a ban on Russian oil will be phased in by year-end.

At 10:42 am Singapore time (0242 GMT), the ICE July Brent futures contract was up 17 cents/b (0.15%) from the previous close at $110.31/b, while the NYMEX June light sweet crude contract rose 3 cents/b (0.03%) at $107.84/b.

Both benchmarks had settled higher by more than $5/b overnight after the EU said it would phase out Russian crude oil imports within six months and halt flows of its oil products by year-end.

If fully implemented, the embargo would take a heavy toll on Russian oil exports. Europe is particularly dependent on Russian oil and was importing about 2.7 million b/d of crude and another 1.5 million b/d products, mostly diesel, before the Feb. 24 invasion of Ukraine.

In recent months, 60% of European imports of diesel have come from Russia, a dependency that rises to 70% for Northwest Europe, while in the Mediterranean 25% of diesel imports come from Russia.

ING analysts Warren Patterson and Wenyu Yao noted risks involved despite the adequate time for EU member states to wind down purchases.

"There is the potential for Russia to halt oil flows to the EU before the wind-down period comes to an end, which would leave the EU scrambling to quickly find other supply," Patterson and Yao said in a May 5 note.

"In addition, there is the risk of secondary sanctions from the US on Russian oil, which would make it difficult for any country to buy Russian oil. Given the tightness in the supply and demand balance, the market would not be able to cope with almost a full loss in Russian oil supply, and so if we were to see this, we would see significantly higher prices."

Kremlin spokesperson Dmitry Peskov on May 4 warned of further pain over higher fuel bills in Europe and said Russia is "calculating various options," in response to the move, the Prime news agency reported.

Broader financial markets saw some relief after the US Federal Reserve on May 4 hiked interest rates in line with expectations, with most Asian equity indices picking up on the upbeat mood overnight and moving higher. The Fed raised its target Fed Funds rate by 50 basis points, while announcing that it will start reducing its bloated balance sheet from June.

Fed chair Jerome Powell also stated that a 75 basis point hike was off the cards for now, easing fears of an overly-aggressive tightening of monetary policy.

"A 75 basis-point hike is the hawkish surprise that markets were fearing, and hearing that it is 'not something the committee is actively considering' has aided to ease some fears of further ramp-up in tightening, at least for now," said IG market strategist Yeap Jun Rong.

The US dollar index eased following the Fed's decision amid investor profit-taking, analysts said. A stronger dollar is expected to hurt demand for dollar-denominated oil.

As of 0242 GMT, the US dollar index was down 0.07% at 102.52.

Dubai crude swaps were higher in mid-morning trade in Asia May 5 from the previous close, though intermonth spreads were lower.

The July Dubai swap was pegged at $102.14/b at 10 am Singapore time (0200 GMT), up $1.65/b (1.64%) from the May 4 Asian market close.

The June-July Dubai swap intermonth spread was pegged at $2.23/b at 10 am SGT, down 11 cents/b over the same period, and the July-August intermonth spread was pegged at $1.75/b, down 8 cents/b.

The July Brent/Dubai EFS was pegged at $8.15/b, down 8 cents/b.