Oil at New Highs as Russia Mulls Ukraine

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearby delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied more than 3% on Tuesday, lifting international crude benchmark to a $99.50 per barrel (bbl) 7-1/2 year high after Russian President Vladimir Putin ordered his troops across the Ukrainian border to support the independence of newly recognized breakaway republics of Donbass and Lugansk in eastern Ukraine, threatening the sovereignty of a major gas transit country in central Europe.

The conflict in eastern Ukraine deteriorated sharply over the weekend, increasing the likelihood of a wider war between Russia and its neighboring ex-Soviet satellite Ukraine. On Monday, Putin signed a decree recognizing Donbass and Lugansk as breakaway republics, and shortly thereafter ordered a "peacekeeping operation" in eastern Ukraine, sending more than 180,000 troops stationed across the Ukrainian border into the former Soviet state. Even more shocking, during a fiery speech Monday night, Putin questioned the very existence of the Ukrainian state, calling it a failure in Soviet nation building. The news rattled global financial and commodity markets.

U.S. and international crude benchmarks are currently trading at their highest prices since the third quarter 2014, adding more than $5 since the beginning of the conflict. NYMEX West Texas Intermediate for March delivery spiked to $96 bbl in overnight trade ahead of expiration this afternoon, paring the advance to $93.65, while holding a $0.75 premium to the April contact. Brent April contract on Intercontinental Exchange was trading up $2 at $97.35 bbl. March RBOB futures surge more than 9 cents to trade near $2.7635 gallon, and front-month ULSD futures advanced to $2.8735 gallon.

Natural gas prices on European spot markets surged more than 9% this morning, with the rally following news German Chancellor Olaf Scholz said Nord Stream 2 pipeline approval would not happen for the time being. The completed Russian-German natural gas pipeline was in the regulatory approval process.

European officials have previously said sanctions on Russia's oil and gas infrastructure and industry are currently not being considered, a recognition that such measures would lead to unsustainable price increases. But even sanctions against Russia's banking and other sectors could lead to supply disruptions because traders may pull back from the risk of working with a sanctioned country. Experts say the Western sanctions being discussed could cut off about 7% of the world's oil supply. Russia produces more than 10% of the oil consumed by the world, ranks as the second largest gas producer in the world behind the United States, and holds 18% of the world's coal reserves. Further, Russia is also the world's largest wheat exporter, and Ukraine is the third largest exporter. The impact of Russo-Ukrainian conflict could be devastating for the global economy.

The issue with EU sanctions on Russia's energy sector is that all 27 member states would need to agree on terms to punish Moscow, and EU countries have various degrees of dependence on Russian oil and gas. For instance, Italy draws close to 50% of its energy demand from Russian gas, Austria only 15%, while France relies primarily on nuclear power generation as its domestic source of energy.

Italy's Prime Minister Mario Draghi noted, "Germany uses coal, gas and still has some old nuclear power plants in operation that are gradually being shut down but are still active. France has nuclear power and some gas. Italy has only gas and has no nuclear power and no coal. Therefore, it is clear that it is more exposed."

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

Liubov Georges