DTN Oil

WASHINGTON (DTN) -- Following an explosive rally triggered by fears of an imminent Russian invasion in the Ukraine and potential disruption to European gas supplies, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced early Thursday following an offer of a "diplomatic path" out of the crisis from the United States and the North Atlantic Treaty Organization -- a move Russia described as a positive step to diffuse the tensions.

Although details of the U.S. and NATO response to Russia's security concerns were not made public, the offer of "enhanced dialogue and political solution" over the Ukrainian crisis clearly eased tensions with the Kremlin. Russia's foreign minister Sergei Lavrov said this morning that it will take some time for Moscow to analyze NATO's response and it would not rush to make any decision.

"There will be working-level contacts between Russia and the United States, after which Putin and Biden will decide whether or not they need to speak," Russia's top diplomat added.

Moscow has demanded security guarantees that Ukraine would never join NATO, and that the alliance stops its eastward expansion -- an ultimatum in conflict with the NATO's core principles of open doors and self-determination. NATO Secretary-General Jens Stoltenberg, however, has given the clearest hint yet on where the alliance stands regarding Ukraine's potential membership, saying "decisions on new members have to be made by consensus among 30 allies and the country that chooses or not chooses to join the NATO."

Germany, the European Union's largest economy, has so far refused to send weapons to the Ukraine, saying there could never be a military solution to this crisis.

Germany draws more than half of its gas imports from Russia against around 40% on average for the European Union, according to EU's statistics agency Eurostat. That alone limits options to sanction Moscow should it invade Ukraine considering the risk Moscow could retaliate by cutting off the supply. Nord Stream 2 -- the natural gas pipeline completed late last year that still awaits formal approval by German regulators, would double the capacity for Russian gas exports to the country.

The geopolitical concerns for oil futures comes ahead of a handful of economic data, with investors awaiting the release of the first estimate of U.S. gross domestic product for the fourth quarter and durable goods orders for the final month of 2021, with both reports on tap for an 8:30 AM ET release. Economists forecast annualized growth for the U.S. economy expanded by 5.4% from October to December, more than twice as fast as the 2.3% pace in the previous quarter, while the Atlanta Federal District Bank's GDPNow model estimates annualized growth at 5.1% for the reviewed quarter. However, roaring growth in the final months of 2021 shows signs of slowing in the first half of 2022 amid several headwinds.

High-frequency data suggests U.S. economic growth softened in the first weeks of the year, hammered by the vicious spread of Omicron and worker absenteeism amid ever-changing quarantine guidelines from the U.S. Centers for Disease Control and Prevention. Weekly jobless claims jumped by more than 40% to 286,000 in the first three weeks of January, with fresh data to be released this morning. Consumer sentiment has weakened once again at the start of the year as inflation surged to the highest level in 40 years at 7% in December.

Against this backdrop, U.S. Federal Reserve signaled it was readying the first interest rate hike in more than three years later in the first quarter, as it unwinds ultra-easy monetary policy. Beginning in February, the Fed will increase its holdings of Treasury securities by at least $20 billion per month and mortgageâ??backed securities by at least $10 billion per month, reducing total monthly purchases by $30 billion.

"With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate," the Federal Open Market Committee said in a statement Wednesday afternoon following their two-day monetary policy meeting.

At a post-meeting news conference, Fed Chairman Jerome Powell added that "there's quite a bit of room to raise interest rates without threatening the labor market. We don't rule out raising rates at every FOMC meeting."

In early trade, West Texas Intermediate futures for March delivery advanced $0.88 to trade near $88.24 per barrel (bbl), and international crude benchmark Brent crude jumped above $90 bbl, gaining $0.93 in overnight trade. NYMEX February RBOB futures rallied 2.15 cents to $2.5442 gallon, and the front-month ULSD contract surged 2.8 cents to $2.7720 gallon.

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