Crudes Gain as Ukraine War Outweighs Demand Fears in China

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 moved mixed in early trade Friday, with the U.S. crude benchmark holding above $103 bbl as traders assess the impact of escalating fighting in Ukraine on global oil and commodity trade bruised by international sanctions levied on Moscow for its invasion of the former Soviet state against demand destruction in China besieged by resurgent COVID-19 infections.

China is now facing the biggest wave of COVID-19 infections since Wuhan became the original center of the coronavirus pandemic in early 2020. New COVID-19 infections in China jumped to 2,958 cases on Thursday, a sharp increase from 337 cases reported just ten days ago. To combat the spread, health authorities there once again resorted to stringent lockdowns, mass testing, and business shutdowns across several metropolitan areas.

The cities impacted by the latest outbreak represent 25% of nationwide gross domestic product, according to a Goldman Sachs analysis, leading to a reduction in oil consumption of about 1.15 million bpd for the next three months. On the flip side, this development is likely to provide some relief to a tight global oil market, with weaker Chinese demand realized just as the global market is contending with a falloff in Russian oil exports.

There is a wide range of projections on the degree and extent that Russian oil exports could be impaired by Western sanctions, and through the extension of lost exports, the damaging effect on upstream production. International Energy Agency this week made the most aggressive call yet on the likely falloff in Russian oil output, forecasting a 30% or 3 million bpd decline beginning in April.

Independent analysis suggests the actual decline could be close to 50% over the course of five years, hammered by an absence of equipment for development of unconventional and offshore oil reserves and lack of technological capacities to intensify production at active fields. Existing conventional oil fields use enhanced oil recovery methods, such as hydraulic fracturing to increase oil recovery, with hydraulic fracturing equipment critical for maintaining Russian oil production.

Russia's current output stands at 11.45 million bpd, according to this week's Monthly Oil Market Report from the Organization of the Petroleum Exporting Countries.

Although difficult to pin down, some traders estimate around 2.5 million bpd in Russian crude oil cargos are stranded at sea unable to find buyers. Goldman Sachs estimates that export disruption might be smaller-than-expected as time goes by. Goldman reckons some cargos are still changing hands under-the-radar, noting that many vessels are disabling satellite trackers. Furthermore, flows of oil via long-term contracts, which could represent half of Russian seaborne exports, are less likely to be disrupted, added the wall street investment bank.

Russia is the world's largest oil exporter, shipping 8 million bpd of crude and refined oil products to customers across the globe.

In financial markets, U.S. equity futures edged lower, and the dollar index rebounded from the five-week low 97.975 settlement on Friday, as optimism over ongoing ceasefire talks between Russian and Ukrainian delegations evaporated after Russian President Vladimir Putin called Ukrainian demands "unrealistic," adding that Moscow is ready to find solutions in accordance with its main strategy. The official strategy as it is known to the public was to guarantee Ukraine's neutrality status, demilitarization, cessation of Crimea and breakaway republics of Lugansk and Donbass from the territory of Ukraine.

Fighting has now extended to the Western parts of the country after Russians bombarded several military targets near the city of Lviv, which is situated close to the Poland border. Meanwhile, an offensive in southeast Ukraine appears to have stalled on nearly all fronts, with reports indicating heavy losses among Russian troops and the civilian population. British Intelligence said on Thursday that Putin's troops "have made minimal progress on land, sea or air in recent days."

U.S. Secretary of State Antony Blinken said officials "have real concerns" that Putin could use chemical weapons against Ukraine should the resistance prove too much for the Russian troops to handle. "This is something we are very focused on." Blinken continued.

In early trading, NYMEX April West Texas Intermediate futures advanced $0.57 to trade near $103.56 bbl, and ICE May Brent futures gained $0.45 to $107.12 bbl. NYMEX April RBOB futures slipped 0.50cts to $3.2116 gallon, while April ULSD futures gained 3.38cts to $3.5212 gallon.

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

Liubov Georges