EU Oil Embargo and Brent crude

The EU rule requiring unanimous consent to implement block-level policy is facing a serious challenge. Leaders are struggling to push through a near-term Russian oil embargo.

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A tale of two countries

Europe's problem dealing with Russia can be summarized by the attitude of two neighboring EU members: Slovenia and Hungary. At the start of the conflict, then Prime Minister of Slovenia Jansa called for an immediate halt of oil and gas imports from Russia. Meanwhile, Hungary is still resisting an oil embargo. Even after EC President von der Leyen flew to Budapest over the weekend. The prospect of a delay in further sanctions, or a delay in when the sanctions will be implemented has pulled down oil prices.

Slovenia with its nuclear power plant and gas port is a net exporter of energy. Hungary relies almost entirely on oil and natural gas from Russia, and as a landlocked country does not have a port. While rhetoric can appeal to the emotions of the populace, the reality is that suspending oil and natural gas shipments from Russia will have disparate effects on EU members.

Compromise or change the rules?

The EU has considered a wide range of options for an oil "embargo" that leaves so many exceptions. Yet Hungary still holds out. One of the proposals included announcing an embargo but "phased in" over three years, and effectively allowing more buying going into the winter. Another proposal was that larger countries would impose an embargo immediately, but Eastern countries would have certain exceptions for some years.

The lack of consensus has led to increased calls for doing away with the current structure that requires unanimous consent. For now, negotiations seem stuck. The immediate threat of Europe not buying any gas might be fading.  But the uncertainty that an embargo in some shape could be imposed could keep a floor under the price of Brent, and well above where it was last year.

BRENT chart: distribution

Brent traders have started to distribute since the $13814/t high in March, with the accumulation/distribution line (ACC DIST) reaching levels that had the commodity priced at $85.90 per barrel, but only trading around $102.50 pb now. 

If the ACC DIST indicator fell below $1.762B, it would expose bullish divergence and could cause Brent to deteriorate to last November’s prices.

For that to happen bears must deal with several levels. Major confluence can be observed near $86.00 per barrel. Below there lies the swing low of November ’21 at $65.80/t. 

Between now and $86.00 there is dynamic support at the 20-week average of ~$10 and the top ascending channel trendline, offering current rejection. If the triangular formation is followed by an upward breakout, $125.00 is major resistance, and then the previous high.

Key takeaways

Two European countries, Slovenia and Hungary, have different attitudes towards an embargo on Russian oil; Hungary is resisting sanctions, while Slovenia has been a major exporter of energy due to its nuclear power plant and is supporting them. 

Most proposals put forward by the EU have been rejected by Hungary. This has led to calls for a complete overhaul of the current setup of sanctions. Brent prices might fluctuate because EU member states disagree on whether or not to impose the embargo. But if it is imposed in some shape, it would be a tailwind for Brent.