DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Wednesday's session sharply higher, with both U.S. and international crude benchmarks spiking more than 5%. The gains came after Russian officials warned the Caspian Pipeline Consortium pipeline sustained extensive damage from storm-like conditions over the Black Sea, potentially removing up to 1 million barrels per day (bpd) or 1% of oil supply from the global market for two months, while larger-than-expected declines in U.S. commercial crude and petroleum product inventories lent additional support.

Russia announced on Tuesday it throttled throughput on the major pipeline that carries crude oil from Kazakhstan's Tengiz oilfields along the Caspian Sea to ports on the Russian coastline of the Black Sea. According to Russian officials, part of a marine port sustained severe damages that could take 1-1/2 to 2 months to repair given "current market conditions," an apparent reference to recent Western sanctions.

The pipeline's capacity is about 1.4 million bpd, and accounts for transporting about 2.5% of global seaborne oil trade and around two-thirds of Kazakhstan's oil exports, making it a vital artery for the country's economy. Refiners in the Mediterranean and Western Europe are the largest buyers of CPC Blend, with refiners in Italy, the Netherlands, France, and Turkey being the largest buyers of the grade last year.

The timing of the shutdown is curious considering European governments are in discussions this week over sanctioning Russian oil exports in response to Russia's invasion of Ukraine.

Millions of barrels of Russian oil are still finding a way to buyers despite the reluctance of U.S. and European companies to deal with Russian cargos, according to traders and analysts. Some suggest Russian oil exports "have gone underground" as the market adjusts to new risks in dealing with Russian oil. So far, combined exports of crude and products appear to be running at normal levels, with Baltic port activity at 1.55 million bpd and the Black Sea at 325,000 bpd. Much of this oil might be going into storage from where it could be resold to refiners, bypassing reputational risk and sanctions. Others suggest that Russian oil exports will collapse by 2 million to 3 million bpd in coming weeks as Western companies shun any dealings with oil shipments from the sanctioned country.

Shut-in oil flow on the CPC pipeline comes as markets grapple with already dwindling spare capacity and shortages in several markets. Chaos in global supply chains is unlikely to ease anytime soon, according to Federal Reserve Chair Pro Tempore Jerome Powell, who gave a pivotal speech this week in front of the National Association of Business Economics, citing COVID-related shutdowns in China and the blockade of Ukraine's Back Sea ports of Mariupol and Odessa. With Moscow's war raging in Ukraine, exporters and logistics firms are now forced to find new transportation routes that would avoid combat zones and Russia's massive landmass. Europe's largest freight companies are reportedly looking at a combination of sea-air solutions that could help manufacturers prevent production disruptions but add to transportation costs.

Further supporting the oil complex, U.S. total oil and petroleum products stocks fell 6.7 million bbl in the week ended March 18 to the lowest inventory level since November 2014 at 1.136 billion bbl. Included in the draw was a 2.5 million bbl decline in commercial crude oil inventories that now stand more than 13% below the five-year average. Domestic refiners increased run rate last week by a larger-than-expected margin to 91.1% of capacity, while processing 276,000 bpd more crude from the previous week.

Surprisingly, domestic oil production once again showed no response to $100 bbl oil prices, stalling near 11.6 million bpd since the start of February. At this production rate, domestic oil output is still below its 13 million bpd record high reached before the pandemic.

Gasoline inventories declined 2.9 million bbl in the reviewed week compared with expectations for inventories to have been drawn down by 1.5 million bbl. Distillate stocks fell 2.1 bbl to 112.1 million bbl, and are now about 17% below the five-year average, EIA data shows. Analysts expected distillates inventories would fall by 800,000 bbl from the previous week. Demand for distillate fuels increased 812,000 bpd from the prior week to 4.516 million bpd.

On the session, NYMEX May West Texas Intermediate futures advanced $5.66 per bbl to settle a tad below $115 at $114.93 bbl, and ICE May Brent futures rallied to $121.60 per bbl, up $6.12 since Tuesday's settlement. NYMEX April RBOB futures registered a 10.80-cent gain for a $3.4387-per-gallon settlement, and April ULSD futures spiked 25.06 cents or 6% to $4.1148 per gallon.

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

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