DTN Oil

WASHINGTON (DTN) -- Following an unprecedented three-day rally that pushed contracts to 10-year highs or more triggered by the crisis in Ukraine and subsequent sanctions on Russia for its unprovoked invasion of the European country, oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange dropped back Thursday amid signs of progress in reviving a nuclear deal with the Islamic Republic of Iran that could unfreeze up to 1 million barrels per day (bpd) of crude oil exports for a tight global market amid underproduction by the OPEC+ coalition and deepening embargo on Russia's oil and gas exports.

The list of companies fleeing Russia's energy complex have now expanded to ExxonMobil, Chevron, Shell and British Petroleum, as investors increasingly view Russian business as toxic. Russia is now under a severe sanction regime that sent its national currency, the ruble, in freefall, crushed its stock market and spiked inflation in a matter of days.

For the oil complex, this means Russia is unable to sustainably sell its crude oil on the global oil market and grow its oil production long-term. Analysts estimate sanctions have already trapped between 50% and 70% of Russian oil within the country.

As the conflict between Ukraine and Russia entered its seventh day, the Biden administration hinted that it is ready to ban Russian oil and petroleum product imports in the United States as a response to escalating violence in Ukraine. U.S. imported an average of 209,000 bpd of crude oil and 500,000 bpd of other petroleum products from Russia last year, according to the American Fuel and Petrochemical Manufacturers trade association. This represented about 3% of U.S. crude oil imports and 1% of the total crude oil processed by U.S. refineries. By contrast, the U.S. imported 61% of its crude oil from Canada, 10% from Mexico, and 6% from Saudi Arabia.

Against this backdrop, news over a potential ceasefire between Russia and Ukraine might have weighed on oil prices Thursday afternoon, although analysts note it is unlikely Russian President Vladimir Putin will stop his deadly assault on Ukraine at this point.

What could help offset some of the disruption in Russian oil shipments is the prospect for more oil exports from Iran that are now under sanctions. International talks aimed at reviving the Joint Comprehensive Plan of Action agreement with Iran are said to have entered into the final stage after the head of the International Atomic Energy Agency, Rafael Mariano Grossi, confirmed his visit to Iran for further consultations. Any deal with Iran would almost certainly include an easing of U.S. sanctions on Iran's oil exports. JP Morgan estimates Iran could raise oil exports by 1 million bpd over the next two months from floating storage and a further 800,000 bpd through the second half of the year.

Against that backdrop however, Libya's largest oil field, El Sharara, with production rate of 290,000 bpd halted operations on Thursday after an unknown group shut down one of its main valves, according to a statement from Libya National Oil Corporation. The disruption can very well extend into next week and follows closure of Libya's six oil terminals on the Mediterranean coastline due to bad weather and some protests.

Libya slipped into political turmoil once again this week after a newly appointed minister in one of Libya's rival governments resigned, alleging that the vote in the eastern city of Tobruk on Tuesday (3/1) that ushered in a new administration failed to include all of the country's factions. Armed conflict could reignite amid a standoff between two rival governments in Libya, that risks resulting into a territorial division after the parliament in the east swore in a new administration while the United Nation's recognized government in Tripoli refused to cede power.

Libya's fragile peace collapsed several times since the civil war broke out in 2011 leading to the ouster of longtime strongman Muammar Gaddafi.

On the session, NYMEX April West Texas Intermediate fell $2.93 to $107.67 barrel (bbl), and ICE Brent May contract declined $2.47 for a $110.46 bbl settlement. NYMEX April RBOB futures settled down 2.39 cents at $3.32844 gallon, and April ULSD futures edged up 0.87 cents to $3.5034 gallon. Overnight, Brent crude reached a $119.84 10-year high on the spot continuous chart, and NYMEX oil futures all rallied to their highest prices points on the spot in 14 years. WTI traded as high as $116.57 bbl, RBOB $3.5221 gallon, and ULSD $3.8416 gallon.

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