German inflation hit a fresh record high of 8.7% in May, above the 8.1% penciled in by analysts. The data gave a boost to the European Central Bank (ECB) hawks and helped the EUR/USD extend gains to 1.0780.
The ECB will likely stick to a series of 25bp hikes until the end of the year, but there is a rising expectation that the ECB could raise the rates by 50bps in the June meeting, and the money markets price in 110+bp hikes from June to the year-end. And the pricing could get more aggressive as the Europeans finally start taking concrete action about the Russian sanctions.
The partial ban
Yesterday, the European leaders finally announced their decision to partially ban the Russian oil.
Supplies from sea will no longer be purchased, while the pipeline supplies will be abandoned gradually.
As such, Europe will reduce two-thirds of its oil imports from Russia, which will reportedly cost Russia around $10 billion in lost revenue.
Of course, the news suggests that the inflation situation in Europe, and in the West, could get worse before it gets better. Due today, the inflation in Eurozone will likely confirm a further rise to 7.7% and maybe, even more, in May preliminary reading.
Even though we saw some easing in US inflation figures earlier this month, the relentless positive pressure on oil prices is very much worrying across the Atlantic as well. The barrel of US crude extended gains to near $120 per barrel on the news of the European ban of the Russian oil, and Brent crude spiked above $123 per barrel.
Even though oil advanced to levels that look interesting for selling a top, the positive pressure is too strong for betting on a downside correction in the short run. Shorting oil has become a risky bet, as following the European ban, there is a stronger case building for a further extension of the gains.
Will European ban affect OPEC decision?
Will the European decision to ban the Russian oil would impact the OPEC’s decision about production; would the OPEC nations pump more to replace the Russian oil for European exports?
They probably won’t for two reasons. First, the OPEC sticks to its OPEC+ agreement since the beginning of the war in Ukraine, showing a solid support for Russia in this battle. Therefore, they won’t necessarily applause the European decision to ban a partner’s oil. And second, the OPEC nations don’t necessarily have the capacity to replace the Russian oil, as they already struggle meeting their own quotas since months.
And if we leave the Ukraine war aside for a minute, it’s, in all cases, better for the OPEC countries to pump less and sell their oil at a higher price. In this sense, the Ukraine war and the OPEC’s close ties with Russia are a great excuse to keep production tight, and collect the money.