Oil Rallies With Geopolitics, OECD Inventories in Focus

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Clawing back all of the losses sustained in Monday's selloff, oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied more than 2% on Tuesday as market participants assessed growing risks of severe sanctions on Russian energy exports in response to the escalating tensions along the Ukrainian border and lower-than-expected inventory levels held by the industrialized countries which have heightened concern over tightening market fundamentals.

Media airwaves were hit on Tuesday with the reports suggesting the Biden administration is considering export controls on Russia's high-tech and semiconductor industries. Specifically, the United States is threatening to use the foreign direct product technology to halt shipments of essential parts Russia needs to grow its industrial capacities. The White House said export control measures would go beyond sanction packages the U.S. and European allies are prepared to enact should Russia invade Ukraine.

Such a move would likely be met with retaliatory measures from the Kremlin that could include the reduction or pause of crude and gas shipments to the West.

Russia is a major gas supplier to the European Union, accounting for the supply covering almost 40% of its energy demand. Some European countries, including Finland, Lithuania, and Hungary, meet nearly 70% of their energy demand with Russian gas imports. European gas prices surged more than 15% on Monday amid fears tensions along the Ukrainian border could disrupt gas flows.

EU buyers have increasingly turned to gas storage for supplies instead of buying on the spot market at record-high prices. The amount of gas in storage in EU is already at its lowest in a decade for this time of year at 473 terawatt-hours (TWh), according to Gas Infrastructure Europe. Gas stocks accounting for 392 TWh have already been depleted over the last three months since their peak on Oct. 21, 2021, and inventories are likely to continue falling for another two months, based on experience over the last decade.

If the dispute results in the imposition of sanctions by the United States and the EU, and Russia responds by threatening or actually reducing gas deliveries, the risk to inventories would rise sharply.

Tuesday afternoon, oil traders also positioned ahead of the release of U.S. inventory data from the American Petroleum Institute on tap for 4:30 p.m. EST. U.S. oil inventories are projected to have fallen by 800,000 barrels (bbl) for the week ended Jan. 21, with estimates ranging from a decrease of 5 million bbl to an increase of 2 million bbl.

Gasoline stockpiles are expected to have risen by 2.3 million bbl from the previous week, while stocks of distillates are seen decreasing by 1.6 million bbl. Refinery runs likely fell 0.3% from the previous week to 87.8% of capacity last week.

In outside markets, the U.S. dollar pared back a portion of midmorning gains, finishing the session at 95.928 against global peers as currency traders awaited the statement from the Federal Open Market Committee on Wednesday. Speculation has swirled FOMC could move more aggressively to rein in surging inflation that came in at 7% in December -- the highest in 40 years. Fed is widely expected to signal the first interest rate hike in three years in March, while unwinding its monthly bond purchases. The Fed is currently buying $60 billion of bonds each month -- half the level prior to the November taper and $30 billion less than in December. Goldman Sachs forecasts at least four hikes in the federal funds rate this year. CME Group's FedWatch tool sees a small chance for the central bank to announce a rate hike Wednesday, and overwhelmingly a 25-basis-point increase on March 16 when FOMC meets next.

On the session, West Texas Intermediate futures for March delivery added $2.29 or 2.5% to settle at $85.60 bbl and international crude benchmark Brent advanced $1.93 to $88.20 bbl. Both benchmarks fell as much as 2% on Monday. NYMEX February RBOB futures rallied 6.15 cents to $2.4595 gallon, and the front-month ULSD contract surged to $2.6691 gallon.

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

Liubov Georges