DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved mixed in afternoon trade Friday, with the international crude benchmark edging higher into settlement amid reports of escalating violence in Russia-controlled regions of eastern Ukraine that, according to U.S. officials, could serve as a pretext for an attack by Moscow that would trigger sanctions on the country's oil and gas exports.

As tensions mount, a lack of clarity over Moscow's intentions towards Kyiv spurred investors to exit risky assets Friday for the safety of U.S. currency and Treasury bonds. All three major U.S. stock indexes posted with Dow Jones Industrials shedding 232 points after falling more than 600 points Thursday in its steepest one-day decline of 2022. The S&P 500 dropped 0.7% on the day, bringing its weekly decline to more than 1.5%.

The U.S. dollar strengthened against a basket of foreign currencies, settling Friday's session above 96-level, while weighing on front-month West Texas Intermediate futures. U.S. crude benchmark for March delivery finished just above $91 barrel (bbl) after trading as low as $89.03 bbl, and April Brent added $0.57 for a $93.54 bbl settlement. Refined products futures finished Friday's session with mixed results, with NYMEX RBOB futures gaining 2.10 cents to $2.6696 gallon and the front-month ULSD contract slipped to $2.7815, down 0.47 cents on the session.

Two narratives dominated the oil market this week with the risk of supply disruption in Eastern Europe should Russian-Ukrainian tensions spill over into war stoking fears over looming sanctions on Russian oil and gas exports. Offsetting the bullish development was progress in Iranian nuclear talks this week that raised expectations the country could soon ramp up its oil exports, easing a tightening global oil market.

The oil market remains in a very vulnerable disposition with demand rebounding from pandemic restrictions and supply growth lagging behind, leading global oil inventories to have fallen to their lowest level in seven years. Forecasting models suggest global oil inventories are unlikely to return to their five-year average until at least mid-2023. In a tight market like this, potential supply disruptions would have an outsized impact on oil prices.

Friday afternoon, U.S. officials reiterated that the risk of Russian attack in eastern Ukraine is now higher than ever as Moscow failed to provide evidence of troop de-escalation along the Ukrainian border. According to Ukraine's wire services, Russian special services are placing explosives at a number of social infrastructure facilities in Donetsk and Lugansk -- a move that serve as a pretext to launch an invasion.

Earlier Friday, Russian-backed separatists in eastern Ukraine began evacuating civilians from breakaway regions of Donetsk and Lugansk into Russia.

Offsetting supply concerns in Europe, international nuclear talks in Vienna aimed at reviving the 2015 Joint Comprehensive Plan of Action showed clear signs of progress this week, with several diplomats familiar with negotiations suggesting a deal could be signed within days. The new agreement reportedly includes 90- to 120-day waivers on Iran's oil exports that would be preceded by unfreezing Iranian cash and suspending Iran's enrichment of uranium above 5%.

Officials from South Korea and Japan -- two major export markets for Iran's crude oil -- held meetings with Tehran on Thursday (2/17) to discuss oil sales and the unfreezing of Iranian funds in Asian banks. According to analysts, Iran could quickly ramp up oil sales to above 2 million barrels per day (bpd) by tapping sizable oil reserves held in offshore storage, easing concerns over a shortage of oil supplies on the global market.

Iran is currently producing around 2.5 million bpd according to secondary sources cited by the Organization of the Petroleum Exporting Countries but is estimated to have a capacity of closer to 3.8 million bpd. Therefore, over time there is the potential for 1.3 million bpd of additional supply to come onto the market.

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