Oil rallied as supply concerns took center stage with the EU threatening to ban Russian supplies this year and U.S. regional fuel inventories dropping to record lows. 

Futures in New York climbed more than 5 per cent to settle at US$107.81 on Wednesday, while Brent closed above US$110 for the first time since mid-April. The European Union said it plans to ban Russian crude and refined by the end of this year. 

“This will be a complete import ban on all Russian oil, seaborne and pipeline, crude and refined,” European Commission President Ursula von der Leyen said. 

Adding to the sense of supply pressure, East Coast diesel inventories fell to a record low as U.S. refiners increasingly supply global markets in the absence of Russian product, according to data from the Energy Information Administration.

Europe is highly dependent on Russian crude, and some countries will find it easier to switch supply than others. Russia shipped about 720,000 barrels a day of crude to European refineries through its main pipeline to the region last year. That compares with seaborne volumes of 1.57 million barrels a day from its Baltic, Black Sea and Arctic ports.

The European Commission’s plan “removes some of the overhang from a lack of a clear proposal in prior weeks,” said Rohan Reddy, director of research at Global X Management. “It’s a clear signal by the EU that the bloc is willing to move on from Russian oil, despite its current dependence on it. It will need to be voted on by the EU’s member states, but putting forth a framework is a major step.”

Hungary and Slovakia, which have been opposed to a swift cutoff of Russian oil, will be granted a longer time frame -- until the end of 2023 -- to enforce the sanctions, according to people with knowledge of the matter.

The phaseout of Russian oil in Europe will come at a time when the world is grappling with a refined-product crisis -- potentially making it all the more costly for the region to wean itself off Russian fuels such as diesel. 

Prices:

• West Texas Intermediate for June delivery rose US$5.40 to settle at US$107.81 a barrel in New York.
• Brent futures for July settlement increased US$5.17 to settle at US$110.14 a barrel.

The U.S. diesel crack spread -- a gauge of the profitability of turning crude into diesel -- has surged this year as countries cut back on Russian fuel, depleting supplies. 

Oil investors are also counting down to a meeting on Thursday of the Organization of Petroleum Exporting Countries and its allies on production policy. The 23-nation group is expected to ratify another modest supply increase amid signs that the alliance is failing to deliver agreed-upon volumes.