Oil Surges 8% as Traders Circumvent Russian Crude Shipments

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 rallied again Tuesday, sending U.S. crude benchmark above $104 barrel (bbl) as intensifying fighting in the Ukraine could lead to additional sanctions on Russian oil shipments at a time when the Organization of the Petroleum Exporting Countries seen unable to quickly boost crude production to bridge a growing shortfall in lost Russian exports.

As violence in Ukraine intensifies by the minute, traders are increasingly refusing to deal with Russian oil shipments while banks scrap financing deals, according to industry sources. Vitol and Trafigura Group, two of the world's biggest independent oil traders, said on Tuesday they were unable to sell any of the Russian crude they hold in long-term contracts. Reasonably, market participants fear sanctions on Russia's oil and gas shipments could be announced any minute and stop cargoes in transit before they reach buyers.

Traders are offering Urals crude, Russia's flagship oil grade, at massive discounts of around $10 bbl compared to the front-month Brent crude. A sharp drop in the price of ESPO, a grade of Russian crude popular in Asia, suggests refiners in Japan and South Korea are pausing purchases from Russia alongside those in Europe and the United States.

Adding further pressure on the oil complex, a growing list of international oil companies have dumped investments and walked away from cooperation agreements with their Russian counterparts in response to the developing situation in Ukraine. London-based Shell plc said Monday it was ditching its joint venture with Gazprom, walking away from 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.

Even news released late Tuesday that the U.S. and oil-consuming members of the International Energy Agency will release 60 million bbl of oil from strategic stockpiles didn't tamp down the price rally. While the group said it would "send a unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia's invasion of Ukraine," the market clearly sees otherwise. The release of strategic reserves is simply not enough to move the needle on oil prices.

Traders now await U.S. President Joe Biden's first State of the Union address when he could announce additional sanctions against Russia in response to the shocking bombing of Ukrainian cities.

Frustrated with the slow progress in their offensive, Russian forces seemed to have altered their tactics by terrorizing civilians and targeting Ukrainian city centers in broad daylight. On Monday, the International Criminal Court said it would open an investigation into whether Russia has committed war crimes and crimes against humanity in 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 -- Kyiv.

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 2 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.

Meanwhile, U.S. crude oil stockpiles are projected to have risen by 2.2 million bbl for the week ended Feb. 25. Gasoline stockpiles are expected to have fallen by 1.4 million bbl from the previous week. Stocks of distillates are expected to have decreased by 1.4 million bbl from the previous week. Refinery use likely fell by 0.2% from the previous week to 87.2% of capacity.

At settlement, NYMEX West Texas Intermediate for April delivery spiked $7.69 to $103.41 bbl, and ICE Brent May contract jumped $7 to $104.97 bbl. NYMEX April RBOB futures rallied 15.62 cents or 5.95% to $3.0887 gallon, with April ULSD futures spiked nearly 22 cents to $3.1511 gallon.

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

Liubov Georges