DTN Oil

WASHINGTON (DTN) -- After overnight gains following Monday's selloff triggered by new COVID-19 shutdowns in China and prospects of slowing global economic growth, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange again reversed lower as investors monitored the next round of Russian-Ukrainian ceasefire talks in Turkey amid an apparent shift in strategy from Moscow that is repositioning its troops along the borders of the breakaway republics of Donbass and Lugansk.

The Russian invasion of Ukraine, which has roiled equity and commodity markets in recent weeks, will remain the focus of trading on Tuesday with a new round of diplomatic talks scheduled to begin Tuesday in Istanbul.

Wire services in Russia reported the country's defense minister, Sergei Shoigy, confirmed the first phase of Russia's military operations have been completed and Russian troops would now focus solely on "liberating" separatist republics of Donbass and Lugansk. Should the new strategy prove truthful it would mean the withdrawal of Russian troops from northern Ukraine and elsewhere within the European country, localizing the conflict to the breakaway provinces in the east.

The conflict has led to some loss of Russian oil exports, according to private data, as Western traders and banks refuse to deal directly with Russian oil shipments. International Energy Forum, a multilateral organization based in Riyadh, estimates Russian oil flows have probably fallen by 1.5 million bpd since the beginning of the invasion. Still, it will take around two weeks until there is concrete evidence and that the Organization of the Petroleum Exporting Countries would want to assess that data, IEF Secretary-General Joe McMonigle told Bloomberg Television. There have also been reports suggesting that Russia turned to selling crude at steep discounts in off-market transactions that allow buyers to shield their identities from the stigma of trading with Russian firms.

Against this backdrop, investors will turn their focus to the OPEC+ ministerial meeting on Thursday (3/31) when the group will decide on production quotas for May. OPEC+ will likely agree on a modest increase of 400,000 bpd, in line with its July 2021 agreement, without adjusting to make up for the fall in Russian exports. OPEC+ has previously signaled that the recent spike in oil prices was due to geopolitical tensions with little evidence yet of the market being significantly undersupplied.

Analysts also believe OPEC+ is increasingly running out of spare capacity, meaning the group has no other option but to lift production rates in small, incremental steps. The International Energy Agency has warned that OPEC+ would need to "go through an investment cycle before it is able to add significant capacity beyond what it will reach this year."

The combination of COVID flare-up in China and prospects of reduced fuel demand sent oil prices tumbling on Monday, with both crude benchmarks registering 7% losses. China announced new lockdown measures for its financial center Shanghai, where COVID-19 infections nearly tripled over the past week. Municipal health officials will now test the city of 25 million people in two separate stages that run through April 5th. The lockdown follows similar measures introduced in manufacturing center of Shenzhen in the Jilin province and Langfang City near Beijing.

China has struggled to contain a highly infectious Omicron variant, BA.2, that has spread like wildfire in recent days despite Beijing's "zero-tolerance policy" and led to Chinese officials locking down entire cities to stop the spread. Private data shows peak road congestion in Shanghai was down 36% on Sunday (3/27) from a year earlier, while in Beijing, which is not yet subject to restrictions, traffic levels were 25% lower year-on-year. China has imposed more quarantine measures over the past two weeks than at any other point in the pandemic.

In early trading, NYMEX May West Texas Intermediate futures was down $2.65 to trade near $103.30 bbl, and ICE May Brent futures fell $2.50 to near $110 bbl. NYMEX April ULSD futures fell 12 cents to $3.6625 gallon, and April RBOB futures declined nearly 4.5 cents to $3.1750 gallon.

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