Oil Tops $110 as Traders Wait for OPEC+ Supply Response

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 advanced more than 4% early Wednesday, turbocharged by signals coming from OPEC+ producers that they are likely to agree to only a moderate supply increase next month despite a rapidly deteriorating situation in Ukraine and a growing reluctance of traders to purchase Russian oil cargos.

The group of 23 crude producers are expected to agree on a 400,000 barrels per day (bpd) increase in crude output for April later Wednesday, in line with previous months, as they are seen adhering to their July 2021 accord. OPEC+'s reluctance to change a strategy of gradual production increases is likely influenced by the inability of some producers within the group to meet their current output targets. For instance, Iraq, the second largest producer within the cartel, missed its production target for February by 150,000 bpd, lifting compliance with the OPEC+ agreement to 146%, according to the analysts. That compares with a 125% compliance rate for January, meaning the supply shortfall from OPEC+ producers widened sharply.

The gap between OPEC+ output and its target levels already surged to as much as 900,000 bpd in January, according to estimates from the International Energy Agency. The question remains, however, on Saudi Arabia's ability to unilaterally raise production to ease the pressure on the market. Saudi Arabia and the United Arab Emirates are seen as the only two producers in the world with significant spare capacity.

Analysts estimate reluctance among traders to buy Russian energy supplies has trapped anywhere between 50% and 70% of its crude exports within the country, sending prices sharply higher. 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 cargos in transit before they reach buyers. Russian exported around 4.5 million barrels of oil each day. For comparison, OPEC+ total spare capacity is estimated at 5 million bpd, according to IEA.

Adding further pressure on the oil complex, a growing list of international oil companies are divesting from Russia's energy industry in response to growing violence in Ukraine. ExxonMobil said Tuesday it is preparing to shut down production from the massive Sakhalin Island development in Russia's Far East. Exxon owns a 30% stake in the project, alongside Russian state-controlled oil producer Rosneft, Japan's Sodeco and India's ONGC Videsh.

"Exxon Mobil supports the people of Ukraine as they seek to defend their freedom and determine their own future as a nation," the company said. "We deplore Russia's military action that violates the territorial integrity of Ukraine and endangers its people."

ExxonMobil's exit from Russia follows announcements by Shell and British Petroleum that they are terminating cooperation on joint projects with their Russian counterparts.

Pleas from the international community and antiwar protests within Russia have done nothing to stop Russian President Vladimir Putin's aggression in Ukraine, with Russian troops pushing further into the country's territory. Frustrated with the slow progress in their offensive, Russian forces are said to have altered tactics by terrorizing civilians and targeting Ukrainian city centers with bombings 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 descends upon the Ukrainian capital of Kyiv.

Domestically, commercial crude oil inventories tumbled 6.1 millionbarrels (bbl) last week, missing calls for a 2.2 million bbl build, according to data released late Tuesday by the American Petroleum Institute. Gasoline stockpiles dropped 2.5 million bbl in the week profiled, above expectations for a 1.4 million bbl draw. API data show distillate inventories added 440,000 bbl versus an expected draw of 1.4 million bbl.

In early trading, NYMEX West Texas Intermediate for April delivery surged more than $6 to top $110 bbl, and ICE Brent May contract jumped $7 to $112.05 bbl. NYMEX April RBOB futures rallied more than 15 cents to $3.2435 gallon, with April ULSD futures spiking nearly 25 cents to $3.3950 gallon.

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

Liubov Georges