DTN Oil

Oil Futures Continue Gains as Aramco CEO Sees Tight Market

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange continued to advance early Monday, as Russia's invasion of Ukraine has upended Russian trade flows while Amin Nasser, CEO of Saudi Arabia's state oil company Aramco, said the global oil market is tight as world demand continues to recover from the pandemic.

Nasser, who expects global oil demand to return to the pre-pandemic level by the end of the year, pegged spare global oil capacity at roughly 2 million barrels per day (bpd), adding that was not enough considering current geopolitical events, according to Reuters.

Now in its 26th day, Russia's brutal invasion of Ukraine, including the targeting of hospitals and citizens in an effort to intimidate Ukrainians and prompt their surrender, has led to numerous sanctions on Russia's economy -- including freezing Russia's central bank assets, and on individuals in government, military and businesses that are either aiding Russian President Vladimir Putin or are associates of Putin seen to have been the benefactor of ill-gotten gains. The United States has sanctioned Russian oil, coal and LNG imports, and the United Kingdom joined suit with sanctions on Russian oil exports, although the European Union is divided on extending sanctions to oil.

EU, which is highly dependent on Russian energy exports, is set to meet this week to discuss the Ukrainian tragedy, with the 27 nations expected to consider additional steps they can take against Putin. Ahead of the gathering, the foreign ministers from Lithuania and Ireland are pushing for sanctions on Russia's oil exports, according to Reuters, although Germany is reluctant. The EU sources 40% of its natural gas requirements from Russia, and fears sanctions could prompt a retaliatory response from Moscow in cutting off gas flow to European customers. Separately, Germany is in talks with Qatar, one of the world's top LNG exporters alongside the United States and Australia, on a long-term energy partnership.

As the EU wrestles with reports depicting increasing atrocities by Russia against Ukraine, Western companies have shunned Russian oil exports, and the number of companies cutting ties with Moscow continues to grow. Over the weekend, Schlumberger, Halliburton Company, and Baker Hughes all said they would suspend futures business in Russia, with the energy technology and services companies saying they would comply with applicable law as they fulfill current contractual labor.

Dramatic events spurred by Putin's Feb. 24 invasion of Ukraine continue to unfold, and, in addition to having immediate short-term effects including supply disruptions, Russia's oil production, last reported by the Organization of the Petroleum Exporting Countries at 11.45 million bpd, is under long-term threat.

Last week, the International Energy Agency projected Russian oil production would drop by as much as 30% or 3 million bpd in April. And while China and India, two of the world's largest oil importers, have been in discussions to purchase discounted Russian oil, it won't be enough to offset Russian oil exports that were estimated to have averaged about 4.5 million bpd to 5 million bpd.

Moreover, sanctions will deny Russia the critical Western expertise it requires in maintaining oil production in some of the world's most hostile environments, including the Russian Far East, Arctic, and eastern Siberia. The weekend announcements by the world's three largest oil service and technology companies testify to this development, not to mention the loss of capital flow.

In early trading, NYMEX April West Texas Intermediate futures were trading at $108.50 barrel (bbl), up $3.80 ahead of expiration Tuesday afternoon, with the May contract holding a $1.50 discount to the expiring contract. ICE May Brent futures were up more than $4.50 near $112.50 bbl. NYMEX April RBOB futures were 9.6 cents higher near $3.3350 gallon, and April ULSD futures were nearly 17.5 cents higher at $3.7725 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne