DTN Oil

WASHINGTON (DTN) -- After retracing most of their price spike triggered by the Feb. 24 Russian invasion of Ukraine, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved mixed early Wednesday following an International Energy Agency forecast for a sharp drop in Russian crude oil production beginning in April as a result of international sanctions levied against Moscow for its unprovoked invasion of its western neighbor that could lead to a global supply shock.

IEA said the prospect of a large-scale disruption to Russian oil production threatens to create a global supply shock in the short-term. The Paris-based energy watchdog estimates that beginning in April, Russian oil production would fall by 3 million bpd -- a staggering loss of supply for a market struggling with laggard production growth from the OPEC+ alliance. U.S. Energy Information Administration pegged the decline in Russian oil production to 750,000 bpd in April -- a more conservative estimate compared to IEA.

"Russia is the world's largest oil exporter, shipping 8 million bpd of crude and refined oil products to customers across the globe. Unprecedented sanctions imposed on Russia to date exclude energy trade for the most part, but major oil companies, trading houses, shipping firms and banks have backed away from doing business with the country," said IEA.

A steep drop in Russian oil production could be offset by slower demand growth in the second half of the year but only partially, according to IEA. The agency expects global oil demand to average 99.7 million bpd for 2022, around 950,000 bpd lower compared to the previous month's forecast. In the second half of the year, IEA cut demand growth by 1.3 million bpd.

These developments are occurring against a backdrop of low oil inventories and persistent upward oil price pressures. Global oil inventories have fallen by 22.1 million bbl in January, according to IEA estimates. At 2.621 billion bbl, inventories were 335.6 million bbl below the 2017-2021 average and at their lowest level since April 2014.

That IEA forecast echoes warnings from OPEC economists who said this week that the Russo-Ukrainian conflict will have a far-reaching impact on global oil demand growth, adding the situation is currently too fluid to accurately attach numbers on that impact.

"Challenges to the global economy -- especially regarding the slowdown of economic growth, rising inflation and the ongoing geopolitical turmoil will impact oil demand in various regions," said OPEC in their Monthly Oil Market Report.

Due to the unclear and rapidly changing situation in Ukraine, OPEC left its global oil demand growth forecast "under assessment" at 4.2 million bpd for 2022, unchanged from the previous forecast, with demand growth for countries that are part of the Organization for Economic Cooperation and Development forecast at 1.9 million bpd and non-OECD at 2.3 million bpd.

Also on Wednesday, investors are watching for the rate decision from the Federal Open Market Committee and inventory report from the U.S. Energy Information Administration for weekly changes in domestic crude and refined products supplies. American Petroleum Institute data showed U.S. commercial crude oil supplies increased 3.75 million bbl last week, missing calls for a draw of 1.8 million bbl. Inventories at the NYMEX delivery point for West Texas Intermediate in Cushing, Oklahoma, added 2.308 million bbl. Gasoline stockpiles dropped 3.794 million bbl in the week profiled, more than twice estimates for decline of 1.5 million bbl. API data show distillate inventories built by 888,000 bbl, missing calls for a 2.1 million bbl draw.

U.S. Federal Reserve concludes its two-day policy meeting Wednesday afternoon, with markets awaiting comments from Fed Chairman Jerome Powell for direction on the central bank's rate path in the face of slowing growth and faster inflation prospects.

The CME Group's FedWatch tool sees a 98.3% chance of the Fed lifting its base rate to between 0.25% and 0.5% this afternoon, with bets now on how many hikes in the federal funds rate the Fed will make this year considering the economy is slowing notably although still expanding. Atlanta's Fed GDPNow model on March 8 estimated U.S. gross domestic product grew in the first quarter at a rate of 0.5%, up from a no growth outlook on March 1.

In early trading, NYMEX April WTI was trading slightly lower at $96.30 bbl, and ICE Brent May contract was below $100 near $99.65 bbl. NYMEX April RBOB futures gained 1cts to $3.0085 gallon, and April ULSD futures advanced 4.75cts to $3.0770 gallon.

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