Oil Falls as Saudis Cut OSPs, Russian Embargo Hits Snag

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell more than 2% in early trade Monday after Saudi Aramco, the world's largest oil producer, slashed its official selling prices for next month deliveries for Asian and European buyers, signaling stalled demand growth amid lockdowns in China and rattled industries in the Eurozone, where a proposed ban on Russian oil imports has been stalled by opposition from Hungary.

Talks between the bloc's 27 countries fell into deadlock Sunday, according to wire services, after Hungarian Prime Minister Viktor Orban reiterated his objection to an all-out embargo on Russian oil imports, citing what would be devastating impacts for the Hungarian economy. On Friday, Orban compared the proposed legislature to a "nuclear bomb" being thrown at the Hungarian economy.

Under the proposed legislation, the European Commission would give Hungary and Slovakia an extended period of time, until the end of 2023, to end purchases of Russian oil, while the other 25 members would phase-out all imports by October. According to reports, the Hungarian government now wants a total opt-out from the ban, while two other member states in Central and Eastern Europe -- Czech Republic and Bulgaria -- have also requested an extended period to transition away from Russian energy trade.

"There is no compromise among member states, but we have to be optimistic," one European Union diplomat said in the aftermath of Sunday's talks.

The ongoing challenges on reaching a viable agreement on a Russian embargo reflect the fact that the measures being proposed would be deeply painful for some countries to absorb. In 2021, almost two-thirds of the bloc's crude oil imports came from Russia, with Russian oil satisfying more than 60% of Slovakia and Hungary's fuel demand, with similar dependencies in neighboring Czech Republic and Bulgaria.

This comes as leaders from G7 countries "committed to phase out dependency on Russian energy, including by phasing out or banning the import of Russian oil."

The G-7 leaders also said they would take measures to prohibit or otherwise prevent the provision of key services on which Russia depends.

"This will reinforce Russia's isolation across all sectors of its economy," according to a G7 statement.

Underlining Monday's move lower in the oil complex is Saudi Aramco's cut to most of its selling prices across Asia, Europe and the Mediterranean for June loadings which reflects flagging demand in Asia and Europe. Aramco slashed its Asian selling price differential by the most for June, down to $4.95 barrel (bbl) from over $9 in May, as lockdowns cut through mobility in China's largest cities. For Northwest Europe-bound crude, Aramco dropped its OSPs by $2.50 bbl to a $5.60 bbl premium to ICE Brent, and its Light grade was down $2.50 bbl to $2.10 bbl.

For U.S.-bound crudes, Aramco maintained pricing for all grades from May. The Extra Light OSP was set at a $7 bbl premium. Arab Light, Medium, and Heavy grades were kept at premiums of $5.65 bbl, $4.95 bbl, and $4.50 bbl, respectively.

Saudi price cut follows OPEC+ meeting that ended on May 5 with approval of yet another modest 432,000 barrels per day (bpd) increase in production quotas for June, continuing to look past the impact of the war in Ukraine on the market as they benefit from a windfall in oil revenue. Even with an expected European ban on Russian oil supplies set to squeeze global supplies further, the 23-country OPEC+ alliance insisted that current supply-demand indicators "pointed to a balanced market," following a 13-minute meeting on May 5.

Near 7:45 a.m. EDT, NYMEX June West Texas Intermediate dropped by more than $3 to trade near $106.37 bbl and Brent crude fell below $110 bbl, down $3.16. NYMEX June RBOB futures retreated from an all-time high settlement $3.7590 gallon, down more than 4 cents, and the front-month ULSD contact declined 10.91 cents to $3.8452 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges