By Barani Krishnan

Investing.com — Will they or won’t they? Europe’s forthcoming action against Russian oil and gas – a potential ban – is like a Sword of Damocles hanging over the bloc and the energy markets: Damned if you do (economically) and damned if you don’t (politically).

The gravity was reflected in crude’s near 9% rebound in the just-ended week, from a 13% tumble in the previous two, as the trade again tried to price in the injury the European Union would be inflicting on itself from the embargo.

The price of crude oil has seen some of its most extreme swings since the Russian invasion began six weeks back. It is unclear if the EU bloc’s 27 member nations would decide to cut off imports from Ukraine, which has 25% of its crude oil and 40% of its natural gas. The question of whether they will do so was the main reason for the volatility.

The situation appeared to have only gotten worse as of Friday.

News reports said EU officials were drafting a phased import ban on Russian oil products, but the measure won’t be floated until after the second round of the French elections at the earliest. 

It was a manifestation of the tight-rope walked by the bloc’s leaders. On one hand, they were eager to fulfill their vow that their imports/money won’t help Russia finance the widely-documented massacre of Ukrainians, such as in Bucha. However, the French President Emmanuel Macron was a key ally and they wanted to prevent him from being punished for his people’s revolt against the high fuel costs and increased food prices caused by conflict.

“The commission and EU members have smartly shied away from defining red lines that would trigger a sanctions response since Russia attacked Ukraine,” Emre Peker, director at the Eurasia Group consultancy, was quoted saying by The New York Times.

“I expect the EU will shy away from defining triggers,” he added, “as continued escalation by Russia in eastern Ukraine and revelations from Bucha and elsewhere continue to drive momentum behind a hardening European stance. Any other major catastrophes that unfold will just add more impetus to the EU response.”

Five rounds of ever more severe financial sanctions have been imposed by the EU on Russia, starting Feb. 24, 2015. It has not yet placed sanctions on Russia’s gas imports, as they are too damaging to Germany.

Germany gets 34% of its oil from Russia. The challenge is not just to find other suppliers, but to also arrange enough land transport to get oil from its two refineries fed by Russian pipelines, including one in Schwedt (eastern city), near the Polish border.

Germany’s ambassador to the United States made clear in a tweet what’s at stake for her country. “Going cold turkey on fossil fuels from Russia would cause a massive, instant disruption,” Emily Haber said. “You cannot turn modern industrial plants on and off like a light switch. The knock-on effects would be felt beyond Germany, the EU’s economic engine and 4th largest economy in the world.”

But it’s not just Europe that’s hurting. Putin admits Russia too is hurting, even though he speaks of diverting Europe’s cargoes to Africa and East Asia.

“The most urgent problem here is the disruption of export logistics,” the Russian president said, referring to the uprooting of decades of established business practices and relationships.

Putin added that it is in addition to the financial difficulties experienced by Russian exports of energy, which had already been delivered to Europe and were not paid. “Banks from these unfriendly countries are delaying the transfer of funds,” he added.

For now, the drafting of the new European measures is being done by a small number of experts at the European Commission, the bloc’s executive arm, led by President Ursula von der Leyen’s chief of staff, Björn Seibert.

A summit of EU officials on Ukraine will be held at the end of May. Officials believe that another Russian offensive similar to the one in Bucha may bring about a delay for the meeting.

This makes it more possible for Europe to take what seemed impossible – although there is still pain on both sides.

Oil: Weekly Settlements & WTI Technical Outlook

Ahead of the Good Friday holiday, global crude benchmark settled Thursday’s trade down slightly at $111.23 per barrel. Brent gained 8.7% for the week after suffering back-to-back losses of 13%.

New York-traded U.S. crude benchmark , or WTI, finished Thursday’s trade up $2.26, or 2.1%, at $106.51. WTI gained 8.8% for the week after taking a 13% plunge in two weeks prior.

Sunil Kumar Dixit (chief technical strategist, skcharting.com), said that the U.S. crude benchmark’s upside could increase to $119 in week ahead if it maintains its momentum.

“WTI gained a whopping $14 from the previous lows of $92.90,” Dixit noted, adding that its bullish momentum was further established by a RSI, or Relative Strength Indicator, reading of 62 and stochastics at 55/48.

“Going in to the week ahead, prices are likely to stay firm, so long as the 38.2% Fibonacci level of $104.50 remains intact as support, and the rally aims to reach an initial $110-$112, that can be extended to $114-$116 or even $119,” Dixit said.

However, crude oil could be in trouble if it falls below $105

“If $104.50 is broken on the way down, a further slide to the 50% Fibonacci level of $96.50 may come rather quickly,” Dixit warned.

Gold: Weekly Market Activity 

Gold inched lower on Thursday but finished with a second consecutive weekly gain as the Ukraine crisis and broadening inflationary pressures lifted the yellow metal’s appeal among safe-haven punters.

In line with gold’s climb, Wall Street also tumbled for a second week in a row on worries that an overly aggressive Federal Reserve might tip the U.S. economy into recession in its bid to fight inflation.

, the front-month gold futures contract on New York’s Comex, settled Thursday’s trade down $12.20, or 0.6%, at $1,972.50 an ounce. For the week though, it rose 1.7%, adding to the previous week’s 1.2% gain.

“Political risk premium through the Ukraine war escalation is building again, which pushed all prices higher in general commodities and that’s really creating that inflation environment,” Stephen Innes, managing partner at SPI Asset Management, said in comments carried by Reuters.

“On the counter side, the market doesn’t know whether this is just a short-term phenomena, or the markets are sort of paring back a little bit of risk because of what Fed’s Lael Brainard said was less hawkish,” Innes added.

Fed Governor Lael Mindard and the soon-to be Vice Chair stated on Tuesday that heavy rate rises were not an option for inflation control.

Adding to the hawkish tone was the FOMC’s meeting minutes from March, released on Wednesday, that said most members of the committee were agreeable to having “one or two” 50 basis point hikes in coming meetings.

Following that, the Fed’s most hawkish policy-maker James Bullard said rates must breach the central bank’s typical target and go as high as 3.5% later this year in order to suppress inflation growing at twice that pace.

“I would like to see the Fed Funds Rate rise to 3.5% in the second half of 2022,” Bullard, who is St. Louis Fed President, said in comments made on Thursday.

After slashing rates to nearly zero at the height of the COVID-19 outbreak, the Fed’s policy-making Federal Open Market Committee, or FOMC, approved the first pandemic-era rate hike on March 16, raising rates by 25 basis points, or a quarter point.

Numerous FOMC members realized that this hike was not enough to contain inflation, which has risen at an alarming 40-year rate. Therefore, more aggressive rates of 50 basis points could be required in the near future. In total, the central bank may make seven rate changes this year.

Bullard stated that the Fed is behind the fight against inflation, and needed to increase rates by 3 percentage points more before year end. His suggestion that the Fed increase rates by 50 basis points, which is half the rate of inflation, was a signal to Bullard. The Fed’s typical target for inflation is just 2% a year.

Following a contraction of 3.5% in 2020, caused by disruptions imposed by COVID-19 in the economy, the U.S. grew at an unprecedented 5.7% rate in 2021. This is the fastest growth since 1982.

However, inflation increased at a faster rate. Inflation grew at a faster pace than ever, according to the Personal Consumption Expenditure Index (an American inflation indicator that is closely monitored by the Fed). It climbed 5.8% from December, and 6.4% during the twelve months to February. 

FOMC officials have vowed to bring inflation back to the Fed’s target range of 2% a year anywhere from between the end of 2022 and the end of 2023.

Technical Outlook for Gold

Dixit from skcharting.com tracks the. He said that this week suggests an inflection for yellow metal.

“RSI and stochastics are supportive of the ongoing upside momentum, which needs decisive buyers at above $1,980 for the next leg up to $2,001 and $2,015,” he said.

However, the weakness of Thursday’s close could lead to some sideways movement as well, he warned.

“When the market reopens for Monday’s Asian and European sessions, there could be a downward move to retest $1,959 that can trigger a short-term correction to $1,932,” Dixit said. 

He said that gold could fall further if it is not held above $1,932, especially given the rising yields on U.S. bonds. 

“Traders need to be watchful about the and yields running to multi-year highs on recession concerns,” Dixit said. “These yields are like double-edged swords that can be both beneficial and destructive to gold, as they spur more inflation-hedging until the starts surging to trigger sell-offs.”

Disclaimer:Barani Krishnan has no positions in any securities and commodities that he mentions.