Oil Surges as Fears Over Russian Crude Supplies Intensify

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 continued higher in early trade Thursday, lifting the international crude benchmark to the highest trade since 2012 and the U.S. crude benchmark to a 14-year high, as market participants assess the impact of severe economic sanctions against Russia's banking sector that have already led to a structural disruption to global oil flows.

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. A bipartisan push for the U.S. to stop importing oil from Russia has gained momentum with the introduction of a bill put forward by a group of nine Republicans seeking a formal ban on Russian oil shipments.

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.

The potential for additional sanctions against Russian oil exports stoked market concern as Western allies might be readying a comprehensive ban on exports of Russian crude shipments. Even without a formal sanction regime however, oil traders are 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.

Earlier this week, traders were 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.

Against this backdrop, OPEC+ decided to maintain their existing plans for increasing collective oil output by 400,000 bpd for April, continuing the terms of an agreement reached in July 2021 as they gradually unwind production cuts made early in the pandemic in April 2020. OPEC+'s reluctance to change strategy is likely influenced by the inability of some producers within the group to meet their current output targets. In February, Iraq, the second largest producer within OPEC, missed its production target by 150,000 bpd, lifting compliance with the OPEC+ agreement to 146%, according to analysts. That compares with a 125% compliance rate for January, meaning that supply shortfall from OPEC+ producers is widening.

OPEC+'s decision comes amid extremely tight global market fundamentals. Oil in commercial stockpiles of countries that are part of the Organization for Economic Cooperation and Development in January were at their lowest point in seven years, according to an International Energy Agency report from February.

In Ukraine, Russian claimed the first Ukrainian city, Kherson with a population of 285,000 people. Kherson is the first regional capital and by far the largest town that Russian forces have taken and held, although Ukrainian Defense Ministry has disputed that the city is under Russian control.

Ukrainians have been heroically holding their cities during the first week of war, paying a huge price in human life. Ukraine's State Emergency Service said more than 2,000 civilians had been killed since the beginning of Russia's invasion, and a government official said there were at least 21 children among the dead.

On the session, NYMEX April West Texas Intermediate surged $2.81 to trade near $113.37 bbl, and ICE Brent May contract jumped above $115 bbl, up $2.75. NYMEX April RBOB futures rallied more than 8 cents to $3.3885 gallon, a nine-year high settlement on the spot continuous chart, and April ULSD futures spiked 10.20 cents to $3.5967 gallon.

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

Liubov Georges