DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied in early trade Thursday, with West Texas Intermediate climbing above $100 bbl as investors assessed progress in Ukrainian-Russian peace talks and the financial implications from the first interest rate hike in the United States since the beginning of the pandemic as U.S. Federal Reserve moves to tackle the fastest inflation growth in four decades.

Underlining the rally in oil complex is ongoing concerns over the effect of international sanctions on Russian crude production and its ability to sell oil on the global market.

International Energy Agency said on Wednesday that Russia's output is likely to fall by 30% or 3 million bpd in April as spot Russian cargoes are shunned by buyers in Europe and the United States. Reports indicate Moscow is looking to boost its oil exports to India and China after a dramatic decline in interest for its oil among Western consumers, but its unclear whether Asian demand for Russian crude could compensate for the lack of buying interest from the West. Russia is the world's largest oil exporter, shipping an average 8 million bpd of crude and refined oil products to customers across the globe.

"The prospect of large-scale disruptions to Russian oil production is threatening to create a global oil supply shock. Only Saudi Arabia and the UAE hold substantial spare capacity that could immediately help to offset a Russian shortfall," said IEA in its monthly Oil Market Report.

Against the backdrop of these dire forecasts, peace talks between Russian and Ukrainian delegations seemed to have hit a wall after Ukrainian President Volodymyr Zelensky said that Russia must recognize Ukraine's borders as of 1991, meaning that Crimean Peninsula and eastern regions of Lugansk and Donbass would remain within Ukraine. Prospects of a ceasefire agreement seemed realistic this week as Russian offensive stalled and Kremlin softened its position over regime change in Ukraine.

Zelensky addressed Germany's Bundestag on Thursday, following a speech to a joint session of the U.S. Congress Wednesday, and repeated his call for a halt to the assault of Mariupol, comparing it to the blockade of Leningrad during the Second World War. The situation remains fluid.

Domestically, the Federal Open Market Committee unveiled its first rate hike since 2018 Wednesday, citing progress in the economy and labor market, adding that the economy was strong enough to withstand another six more rate hikes as it vowed to tame the hottest domestic inflation in more than four decades. The Fed's so-called 'dot plots,' a term used to describe the interest rate projections of the Fed's Open Markets Committee, suggest a Federal Funds rate of around 1.9% by the of this year, implying consecutive rate hikes until December, and 2.8% in 2023 and 2024, even as they expect inflation to moderate heading into the start of next year.

The Fed also released their first of four economic projections in 2022, with its median forecast for economic growth in 2022 revised down from 4% expected in December to a 2.8% growth rate in real gross domestic product. The Fed also ended purchases of Treasuries and mortgage-backed securities this month, an aggressive monetary policy enacted during the early days of the pandemic to ensure market liquidity. The central bank will start to unwind asset purchases, saying today it would begin allowing its $8.9 trillion balance sheet to shrink at a "coming meeting" without elaborating.

The Bureau of Labor Statistics earlier this month reported the Consumer Price Index, a measure of inflation, increased 7.9% year-on-year in February, marking the fourth consecutive month with inflation at a four decade high. Nonetheless, the rate hike comes amid a horrific war in Eastern Europe that has disrupted trade in oil and commodities out of Russia -- a country with a vast geography and abundance of natural resources.

Near 7:45 AM ET, NYMEX April WTI futures jumped above $100 bbl, up more than $5 bbl, and ICE May Brent futures gained $5.41 to $103.41 bbl. NYMEX April RBOB futures advanced 12.95 to $3.1160 gallon, while April ULSD futures rallied 29.58cts to $3.3966 gallon.

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