DTN Oil

WASHINGTON (DTN) -- Reversing a portion of overnight gains, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session 3% higher after several European countries pushed back against a proposed embargo on Russian oil and gas exports -- a step that would accelerate inflation and plunge overexposed EU economies into recession.

The German chancellor, Olaf Scholz, pushed back against calls to ban Russian oil and gas imports, as part of Western sanctions against Moscow over its invasion of Ukraine, warning that such a move could put Europe's energy security at risk.

"Supplying Europe with energy for heat generation, mobility, electricity supply and industry cannot be secured in any other way at the moment. It is therefore of essential importance for the provision of public services and the daily lives of our citizens," said Scholz.

With the European Union drawing as much as 23% of its oil imports from Russia, it could take up to a year to diversify its supplies away from Moscow and build new energy infrastructure. Much of Russia's oil imports into the EU is shipped via a vast pipeline network, including the Druzhba pipeline with capacity of 1.4 million barrels per day (bpd), that could not be quickly replaced by another supply route. European refiners imported some 1.7 million bpd of Russian crude oil via tankers last year, 85% of which consisted of Urals crude, according to data from Kpler.

In terms of gas imports, Europe is using more natural gas than ever. Russia's share of total EU natural gas imports has risen from 31% in 2010 to 38% in 2020, according to Eurostat.

For Russia, the move would be catastrophic for its economy, cutting a vital artery for the government and military budget. Oil and gas make up 60% of Russia's exports, accounting for nearly 20% of Russian gross domestic product and 40% of Russian government revenues. The EU is Russia's largest trading partner and accounts for nearly 40% of Russia's global trade.

A series of dire forecasts have flooded media airwaves, including Russia's Energy Minister, Alexander Novak, saying oil prices would climb above $300 bbl, which would almost certainly crush the global economy.

Scholz's comments come a day after U.S. Secretary of State Antony Blinken said the United States was in talks with European allies about banning imports of Russian oil in an effort to intensify the pressure on Moscow to halt its invasion of Ukraine.

To that end, U.S. officials are said to have initiated dialogue with the Venezuelan government of Nicolas Maduro to quickly lift U.S. sanctions on the country's oil exports that were under strict sanction regime since 2019. As of 2021, Petroleos de Venezuela SA, the country's state oil company, was producing about 800,000 bpd -- only a quarter of what it pumped in the 1990s. Some analysts suggest the country could get production up to 1.2 million bpd in under eight months, particularly if Chevron, the only major American oil producer in Venezuela, can step up production.

For the U.S., the move could be viable since the share of Russian oil imports accounts for only 3% of total oil imports. The vast majority of U.S. imports of Russian oil, some 354,000 bpd, are of unfinished oil products, alongside small volumes of residual fuel oil and distillate fuel oil. These could be easily replaced with Venezuelan and Canadian imports of heavy grade oil.

Even prior to sanctions chatter, oil traders have been reluctant to deal with Russian oil exports, increasingly wary of dealing with Russian oil given the legal and reputational risks involved. Analysts estimate a "self-imposed" embargo cut as much as 2.5 million bpd from the global oil market in recent days.

The list of companies fleeing Russia's energy complex have now expanded to ExxonMobil, Chevron, Shell and British Petroleum, as investors increasingly view Russian business as toxic. J.P. Morgan estimates that nearly 70% of Russian oil is currently struggling to find buyers.

So far, economic sanctions have done little to change Russian President Vladimir Putin's strategy in Ukraine, with reports suggesting shelling against civilians is getting progressively worse across major cities.

On the session, NYMEX April West Texas Intermediate rallied $3.72 or 3.8% to $119.40 barrel (bbl), and ICE Brent May contract advanced $5.10 to $123.21 bbl. NYMEX April RBOB futures gained 2.81 cents to $3.5721 gallon, and April ULSD futures spiked 14.52 cents to $3.9215 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com