DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange powered higher early Monday, briefly sending the U.S. and international crude benchmarks above $130 barrel (bbl) after U.S. and European officials said they are considering sanctions on Russian oil exports in response to escalating violence in Ukraine, resorting to the most potent economic pressure on the Russian government, but also removing millions of barrels from the global market that is in dire need of supplies.

U.S. Secretary of State Antony Blinken said over the weekend the United States and Western allies are "in active discussions about banning imports of Russian oil to our countries, while at the same time maintaining a steady global supply of oil."

The unprecedented measure would remove as much as 5.7 million barrels per day (bpd) of oil instantaneously from the global oil market, lifting oil prices to unsustainably high levels and choking economies around the world. Exinity wealth management estimates oil prices could jump above $200 bbl should Western economies sanction Russian oil without a response from the Organization of the Petroleum Exporting Countries.

To that end, U.S. officials are said to have initiated dialogue with the Venezuelan government of Nicolas Maduro to quickly lift U.S. sanctions on the country's oil exports that were under strict sanction regime since 2019. As of 2021, Petroleos de Venezuela SA, the country's state oil company, was producing about 800,000 bpd -- only a quarter of what it pumped in the 1990s. Some analysts suggest the country could get production up to 1.2 million bpd in under eight months, particularly if Chevron, the only major American oil producer in Venezuela, can step up production.

Even in the most optimistic scenario, Venezuelan exports would not be enough to replace the loss of Russian barrels unless Saudi Arabia and the United Arab Emirates quickly open up the taps, and sanctions on Iran were lifted allowing the Islamic Republic to sell oil openly on the global market.

The issue of sanctioning Russian oil is particularly acute for European Union that draws around 25% of its oil imports from Russia. European refiners imported some 1.7 million bpd of Russian crude oil via tankers last year, 85% of which consisted of Urals crude, according to data from Kpler. In addition to waterborne flows, the Druzhba pipeline system can supply up to 1.4 million bpd of Urals crude to the continent.

Total U.S. imports of Russian oil averaged 670,000 bpd or 7.9% of total demand in 2021. It's also important to note that of this volume just 198,000 bpd was crude oil.

For Russia, however, the move would be devastating, cutting a vital artery for the government and military budget. Oil and gas make up 60% of the Russian economy's exports, accounting for nearly 20% of Russian gross domestic product and 40% of Russian government revenues.

The EU is Russia's largest trading partner and accounts for nearly 40% of Russia's total global trade, with about half of Russia's oil exports and 70% of their natural gas exports going to Europe.

Even prior to sanctions chatter, oil traders have been reluctant to deal with Russian oil exports, increasingly wary of dealing with Russian oil given the legal and reputational risks involved. Analysts estimate a "self-imposed" embargo cut as much as 2.5 million bpd from the global oil market in recent days.

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. J.P. Morgan estimates that nearly 70% of Russian oil is currently struggling to find buyers.

So far, economic sanctions have done little to change Russian President Vladimir Putin's strategy in Ukraine, with reports suggesting shelling against civilians is getting progressively worse across major cities. Several major Ukrainian cities, including Kyiv, Kharkiv, Mariupol and Odessa, have been or are close to being encircled by Russian military, trapping over five million people, and creating a humanitarian catastrophe.

Near 7:45 a.m. EST, NYMEX April West Texas Intermediate rallied $4.92 to trade at $120.66 bbl, and ICE Brent May contract advanced $6.14 to $124.20 bbl. NYMEX April RBOB futures surged 14.16 cents to $3.6856 gallon, and April ULSD futures spiked 21.35 cents to $3.9877 gallon.

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