DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied again Tuesday, lifting international crude benchmark towards $130 barrel (bbl) after U.S. President Joe Biden issued a ban on Russian oil, coal and liquified natural gas imports into the United States as additional measure to pressure Vladimir Putin to de-escalate violence in the Ukraine.

Instead, Russia's president signed an obscure decree on Tuesday restricting exports of "certain products and raw materials" until Dec. 31 to "ensure the security of Russian Federation." It's not immediately clear which products and materials will be included or how severe the restrictions will be. Late Monday, Deputy Prime Minister Alexander Novak indicated Russia was considering a halt to German gas exports through the Nord Stream 1 pipeline that delivers 55 billion cubic meters of natural gas each year from Russia's gas fields into Germany's mainland and Europe's gas infrastructure. The European Union imports as much as 40% of its gas from Russia via a vast pipeline network build over the course of five decades. This infrastructure cannot be quickly replaced by any other routes or sea shipments.

So far, the European Union pushed back against a proposed oil embargo on Russian oil -- a step that would accelerate inflation and plunge overexposed EU economies into recession. Economists estimate that $150 bbl crude oil would boost global consumer prices by another 2%. Inflation in the European Union has hit a record high level of 5% -- more than twice the target set by European Central Bank.

"Supplying Europe with energy for heat generation, mobility, electricity supply and industry cannot be secured in any other way at the moment. It is therefore of essential importance for the provision of public services and the daily lives of our citizens," said German Chancellor Olaf Scholz this week on why Germany has declined to support a ban on Russian oil exports.

For U.S. policymakers, the decision to ban Russian oil imports did not come with a huge price tag. The share of Russian oil imports accounts for only 3% of domestic oil imports. The vast majority of U.S. imports of Russian oil, some 354,000 barrels per day (bpd), are of unfinished oil products, alongside small volumes of residual fuel oil and distillate fuel oil. These could be easily replaced with Venezuelan and Canadian imports of heavy grade oil. 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 lift production to 1.2 million bpd in under eight months, particularly if Chevron, the only major American oil producer in Venezuela, can step up production.

Domestically, consumers are already feeling the pinch from the escalating conflict in Ukraine. As of Tuesday morning, the cost of regular gas in the United States is $4.17 gallon -- a record high, according to AAA, up from $4.06 on Monday. Last week, the average cost was $3.60. The cost for diesel is also nearing the record of $4.84, which was also set in July 2008. The current price for a gallon of diesel is $4.75, more than double what it was in October 2020.

Analysts and traders estimate the only factor that could limit the upside for oil prices is structural demand destruction, meaning recession. Energy and food prices, which were already rising before the conflict in the Ukraine, are now climbing at the fastest rate in 50 years, at a time when wages are increasing slowly, putting pressure on businesses and household finances. Recession in Europe and the United States may be the price for defending freedom and the international legal system.

Also on Tuesday, traders awaited the release of weekly inventory report from the American Petroleum Institute on tap for 4.30 p.m. EST, followed by official statistics from the U.S. Energy Information Administration. Market analysts expect U.S. commercial crude-oil inventories to decline by 400,000 bbl for the week ended March 4. Gasoline stockpiles are expected to fall by 1.9 million bbl from the previous week and distillate fuel inventories seen decreasing by nearly 2 million bbl. Refinery run rates likely rose by 0.4% from the previous week to 88.1% of capacity.

On the session, NYMEX April West Texas Intermediate rallied $4.30 to settle at $123.70 bbl and ICE Brent May contract advanced to $127.98 bbl, up $4.77 from Monday's settlement. NYMEX April RBOB futures gained 11.05 cents to $3.6826 gallon, and April ULSD futures spiked 51.58 cents or 13.30% to $4.4373 gallon.

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