DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied more than 3% Friday after key talks between Russia, Ukraine and the European Union collapsed without an agreement to the ongoing humanitarian crisis in the Donbass region of eastern Ukraine, sparking fears that Moscow could launch a military offensive as early as next week.

U.S. National Security Advisor Jake Sullivan told reporters on Friday the White House believes Russian President Vladimir Putin communicated to his military commanders to prepare for a military offensive in Ukraine before the end of the Winter Olympics.

"We continue to see signs of Russian escalation, including new forces arriving at the Ukrainian border," said Sullivan, warning that all Americans should leave Ukraine in the next 24 to 48 hours.

Additional signs of escalation could be found along the Back Sea coastline, where Russian warships are currently closing in on the Ukrainian water border, effectively creating a naval blockade should war breakout.

The escalation in Russian-Ukraine tensions follows a breakdown in multilateral peace talks in Berlin, where diplomats attempted to reach an agreement on the status of the Donbass region. Russian-backed separatists have been fighting the Ukrainian military in the region since 2014.

After nine hours of talks, neither party to the negotiations could issue a statement that progress in the peace talks had been made. Ukrainian negotiators added the country would not bend to Russian pressure to begin talks with separatists.

For its part, Moscow has denied any plans to invade Ukraine, but did not rule out the scenario of a preventive attack to stop Ukraine from joining the North Atlantic Treaty Organization. For energy markets, military action along the Russian-Ukrainian border could lead to a disruption in natural gas shipments into the European Union. Russia supplies up to 40% of Europe's gas demand.

Potential supply disruption comes against a backdrop of tightening market fundamentals after OPEC+ consistently missed its production targets in the past three months. The International Energy Agency estimates OPEC+ prolonged underperformance has effectively taken roughly 30 million barrels (bbl) or 800,000 barrels per day (bpd) off the market since the start of 2021, according to IEA's monthly Oil Market Report released this morning.

The gap between the group's actual output and its target levels swelled to 900,000 bpd in January, leaving the market vulnerable to supply shocks and geopolitical tensions. As a result, oil inventories held by Organization for Economic Cooperation and Development countries declined by a steep 60 million bbl in December, led by large draws in middle distillates across all regions. At 2.680 billion bbl, OECD industry stocks stand at their lowest level in seven years. A similar assessment was made by the U.S. Energy Information Administration and Organization of the Petroleum Exporting Countries this week.

Preliminary data for January show OECD industry stocks falling another 13.5 million bbl.

At settlement, front-month West Texas Intermediate futures rallied $3.22 or 3.6% to $93.10 bbl, and international crude benchmark for April delivery advanced $3.03 for a $94.44 bbl settlement. NYMEX March RBOB futures moved 7.32 cents higher to $2.7386 gallon, and the front-month ULSD contract surged 8.37 cents to $2.9109 gallon.

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