DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell sharply in early trade Wednesday, with both the U.S. and international crude benchmarks trading as much as 3% lower after Ukrainian President Volodymyr Zelensky suggested he is no longer seeking membership in the North Atlantic Treaty Organization and is open to dialogue with Russian counterparts who offered their terms for "immediate ceasefire" after thirteen days of brutal combat.

Kremlin spokesperson Dmitry Peskov said on Tuesday Russia would cease military operations "in a moment" if Ukraine agrees to formally recognize cessation of Crimea to Russia and independence of the two breakaway republics -- Donbass and Lugansk -- in eastern Ukraine. The third demand is a guarantee of neutral status for Ukraine, meaning Kyiv would never join NATO or the European Union.

Russian President Vladimir Putin's stated war goals were originally to "demilitarize and de-Nazify" Ukraine, both of which implied installing a pro-Russian puppet regime in Kyiv, but it now appears he's prepared to abandon both objectives. In response, Zelensky seemed to be open to a compromise regarding Ukraine's membership in NATO along with status of Crimea and breakaway republics of Donbass and Lugansk.

In an interview to ABC News on Monday he said, "I have cooled down regarding this question a long time ago after we understood that NATO is not prepared to accept Ukraine. The alliance is afraid of controversial things, and confrontation with Russia," he added.

These might be the first signs of an emerging compromise that could end a brutal conflict that has led to the worst humanitarian crisis on the European continent since the end of World War II. More than two million Ukrainians fled the country in the past thirteen days, and the number could swell to well above five million, according to the United Nations.

For the oil market, the conflict has led to fears of a growing supply shock as companies turn away Russian energy commodities, with Russia the world's second largest oil and gas producer. Traders and banks rushed to distance themselves from dealing with Russian oil due to reputational and financial risks involved. A number of western energy companies, including ExxonMobil, Shell, British Petroleum, and Equinor have announced they are stopping operations in Russia and ending partnerships with Russian firms. The Biden Administration on Tuesday formally banned imports of Russian oil, liquefied natural gas and coal to the United States, as well as any new investments in Russia's energy sector. 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 easily be 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.

U.S. Energy Information Administration estimates that lower oil exports would shed 250,000 bpd off Russian's oil production this month and further 500,000 bpd in April. Currently, Russia produces 11.3 million bpd of petroleum and other liquids. " We expect that Russia's liquid fuels production will decrease by about 700,000 million bpd in 2Q22 compared with 1Q22 and then increase slightly in 3Q22.

Separately, the American Petroleum Institute reported domestic crude oil supplies increased 2.811 million barrels (bbl) last week, missing calls for a 400,000 bbl decline. Inventories at the NYMEX delivery point in Cushing, Oklahoma, were fell 367,000 bbl.

Gasoline stockpiles were drawn down 1.988 million bbl in the week profiled, just above estimates for a 1.9 million bbl draw. API data show distillate inventories plunged 5.485 million bbl, more than twice an expected draw of 1.9 million bbl.

Near 7.30 a.m. ET, NYMEX April West Texas Intermediate fell $4.31 to $119.43 bbl, and ICE Brent May contract declined to $124 bbl, down $3.98 from Tuesday's settlement. NYMEX April RBOB futures fell 9 cents to $3.5926 gallon, and April ULSD futures plunged 34.17 cents or 7.88% to $4.0827 gallon.

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