(Bloomberg) — Europe’s planned ban on Russian oil imports and the easing of Covid-19 restrictions in China threaten to add a fresh jolt to surging consumer prices.

Leaders of the European Union agreed Monday that they would pursue a partial ban against Russian oil imports in order to punish Russia for its invasion of Ukraine. This will continue the trend of Europe purchasing less oil from Moscow, and further draw global commodity flows.

“Global trade flows are certain to be upended,” RBC Capital Markets analysts Michael Tran and Helima Croft said in a note. “It will prove economically inflationary for all nations involved.” 

China is showing signs of victory in its fight against Covid. This could lead to a revival of the largest source of demand growth. New cases were brought to the country below 100, which is the first such case since March. Authorities are also loosening restrictions on Shanghai and easing some curbs in Beijing.

Futures rose by as much as 2 percent to $124.10/barrel on Tuesday. This is despite the fact that they are already up around 58% for this year. The surge causes war disruptions and despite China’s demands-sapping measures.

An oil-consuming nation would likely be dismayed by a further rally, given that retail fuel prices have risen far faster than crude price increases. 

Inflation Accelerator

Economists at Rabobank predict Europe’s ban on Russian seaborne oil imports will plunge the 19-nation euro area into a recession at the end of this year. Their full-year forecasts for 2022 show a 2.2% increase and a 0.1% decrease in 2023.

Bloomberg Economics predicts that inflation would rise by 0.2 percentage point in Europe and 0.4% in America if there was a $10 increase in oil prices. However, the effect on economic growth will be negligible for America which itself is a major energy producer.

President Joe Biden’s administration has been battling to bring down fuel prices by releasing emergency stockpiles, but that hasn’t stopped retail gasoline from hitting records and closing in on $5 a gallon. 

The administration even contacted oil companies to inquire about whether it would be possible to bring back the mothballed capacities. To fill a regular family car with diesel, the UK now charges around 100 pounds (or $126).

Germany is trying to take the sting out of the fuel surge by offering a massive discount on public transport to get people out of their cars this summer, but that’s not enough for the International Energy Agency, which has suggested temporary speed limits on the autobahn.

“We are in wartime, in an energy crisis, and we had better prepare for even more difficult times,” IEA Executive Director Fatih Birol told Germany’s Der Spiegel magazine in an interview published Tuesday. “Driving a few kilometers an hour slower is just a tiny compromise compared to the suffering of the people in Ukraine.” 

China’s potential comeback is vitally important. Its recent Covid restrictions kept a lid on prices, which means the nation’s ability to find a balance between sustaining economic growth and fighting the virus may well prove pivotal for the crude market this year.

Insurers fail

Europe’s ban still has to be implemented. To make this happen, diplomats and EU officials must agree on technical details. Representatives from all 27 members states have to formalize the adoption of the sanctions. 

According to sources familiar with the plan, European Commission proposes to prohibit seaborne oil products six months after adoption. However, refined petroleum products would be stopped in eight months. Shipping oil via the massive Druzhba pipe to central Europe from Hungary will not be affected until there is a technical solution that addresses the nation’s energy requirements.

The plan might seem to be an updated version of earlier proposals but it could prove ineffective. Germany and Poland — collectively Europe’s largest buyers of piped oil from Russia by far — have indicated they intend to wean themselves off those deliveries anyway. 

That means Moscow may have to try to ramp up seaborne exports from its two Baltic ports at a time when Europe can’t take them. It’s also unclear how much spare capacity the facilities have for extra barrels.

The EU’s measures would also prohibit services including insuring shipments to anywhere in the world. That matters because the vast majority of the world’s tankers are covered by the International Group of P&I Clubs. Because the organization eventually buys insurance from European businesses it will have to follow EU law.

Structural Shift

The oil ban means Europe’s market will end up being structurally more expensive, as prices drift higher to incentivize local production and attract deliveries from elsewhere.

That’s already had an impact, with surging prices for Brent and West Texas Intermediate and a spike in Russian shipments to Asia as European refineries seek supplies elsewhere in anticipation of the sanctions. However, there is more to come.

Bloomberg has compiled tanker tracking that shows Europe still takes about 770,000 barrels a days of Russian crude oil. Large quantities of this are being sent to refineries in Geneva, operated by Litasco SA (a Russian producer Lukoil PJSC). That’s down from an average of 1.4 million barrels a day in January, the month before Russian troops invaded Ukraine.

Russian barrels will experience a comparable discount over grades from Venezuela and Iran, and may have to stop production as this affects its market potential, say oil traders. 

“The ban will not lead to lasting energy shortages,” Maartje Wijffelaars, a senior economist at Rabobank said. “But it will take time before Russian oil imports are replaced, and oil prices will almost certainly trend higher.”

©2022 Bloomberg L.P.