Oil Again Gains Before OPEC+ Meeting

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange extended their recent rally into early trade Tuesday after reports suggest a rapid escalation in Russia's assault on Ukrainian metropolitan areas that is seen leading to a staggering loss of life among the country's civilian population -- a shift that could open the door for deeper involvement of Western allies into confrontation with the world's leading nuclear power.

On Monday, the International Criminal Court said it would open an investigation into whether Russia has committed war crimes and crimes against humanity in the Ukraine. The decision came just hours after reports emerged that Russian military has begun indiscriminatory shelling in the second largest Ukrainian city of Kharkiv with a population of about 1.5 million people, and as a large military convoy is now closing in on its capital city -- Kiev.

Ukrainian officials condemned the attack, with foreign affairs minister Dmytro Kuleba branding it a "barbaric" assault. As the fighting reached beyond military targets on day six of the Russian invasion that has shaken the post-World War II century world order, reports have emerged that Moscow has used cluster bombs on three populated areas. If confirmed, that would mean the war has reached a worrying new level.

Pentagon officials have previously suggested that Russians, irritated by the slow progress on the ground, may resort to terror tactics to break the Ukrainian resistance.

Russia also appears to have stepped up its attacks on the country's industrial and energy infrastructure, targeting fuel facilities and airfields in what appears to be the next phase of an invasion that has been slowed by fierce resistance by the Ukrainians.

A growing list of international oil companies dumped their investments and walked away from cooperation agreements with their Russian counterparts in response to the developing situation in the Ukraine. The London-based Shell plc said Monday it was ditching its joint venture with Gazprom, dumping its 27.5% stake in the Sakhalin-2 liquified natural gas facility, its 50% stake in a project to develop the Salym fields in western Siberia and its 50% interest in an exploration project in the Gydan peninsula in northwestern Siberia.

"We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security," Shell CEO Ben van Beurden said in a statement.

Shell's move follows British Petroleum's announcement Sunday that it was abandoning one of Russia's biggest foreign investments by exiting its 19.75% stake in Rosneft and associated joint ventures.

Until the invasion began, investors seemed confident the intensifying conflict and sanctions would not disrupt oil exports from Russia. This might be changing. Unprecedented sanctions on Russia's banking sector by Western allies will no doubt erect major obstacles for Russian banks to process transactions for the country's oil and gas shipments.

Russia exports around 4.5 million barrels per day (bpd) of crude oil which would be challenging to replace. The International Energy Agency estimates spare capacity held by the Organization of the Petroleum Exporting Countries is now 5 million bpd and expects it to shrink below 3 million bpd in the second half of the year. This suggests OPEC does not have enough room to raise production to cover a shortfall in Russia's oil exports. Russia is also the world's largest exporter of natural gas. European gas prices jumped 33% overnight as a result of sanctions, further fueling worries of an energy crisis.

At this point, traders anticipate economic warfare between the United States and Russia will eventually disrupt global energy flows in one shape or another, even though both the U.S. and Russian governments insist this is not their intention.

Against this backdrop, OPEC+ are set to meet via videoconference on Wednesday to decide on crude oil production levels for April. Preliminary reports suggest OPEC+ still plans to increase output by 400,000 bpd, in line with the previous month's quotas despite a tightening global oil market.

Near 7:30 a.m. ET, NYMEX West Texas Intermediate for April delivery was nearly $5 higher near $100.50 per barrel (bbl), and ICE Brent May contract nearly $6 to trade just above $103.65 bbl. NYMEX April RBOB futures spiked 11.85 cents or 4% to near $3.05 gallon, with April ULSD futures surging more than 16.5 cents to $3.0970 gallon.

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

Liubov Georges