DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange clawed back most of their steep early losses Tuesday, although all contracts settled the session lower amid signs of de-escalation in the Ukraine crisis after Russian officials indicated they are ready to pull back troops from the capital city of Kyiv to allow for diplomatic talks to take place as Moscow attempts a shift in strategy to claim full control over eastern Ukraine.

Any comments from Russian officials should be met with a healthy dose of skepticism these days, warned U.S. Secretary of State Antony Blinken, referring to remarks from a senior Russian official who suggested Moscow is now ready to de-escalate the conflict in Ukraine. Wire services in Russia quoted Defense Minister Sergei Shoigu saying the first phase of Russia's military operations has been completed and Russian troops would now focus solely on "liberating" separatist republics of Donbass and Lugansk.

Traders quickly judged de-escalation around Kyiv and Chernihiv, key cities in central Ukraine, would not automatically mean the end to the conflict that rattled commodity markets in recent weeks. Russian President Vladimir Putin is reportedly changing strategy after failing to oust Ukrainian President Volodymyr Zelensky, and instead of taking full control of the country is now seeking to divide the sovereign nation into two parts -- an unacceptable condition for Ukraine. Still, hope of de-escalation sent oil prices tumbling on Tuesday, with U.S. benchmark briefly retreating below $100 barrel (bbl) before trimming some of those losses at settlement.

NYMEX May West Texas Intermediate futures dropped back $1.72 to finish the session at $104.24 bbl, and ICE May Brent futures fell a steeper $2.25 for a $110.23 bbl settlement. Next-month June Brent futures narrowed its discount to the May contract $2.52 bbl ahead of Thursday's expiration.

NYMEX April ULSD futures declined 6.73 cents to $3.7161 gallon, modestly narrowing the prompt spread to a still wide 32.69 cents gallon. April RBOB futures softened to $3.2033 gallon, down 1.55 cents from the prior session, and the May contract widened its discount to April delivery to 2.66 cents gallon. The April RBOB and ULSD futures contracts expire alongside May Brent Thursday afternoon.

The conflict has already 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 barrels per day (bpd) since the beginning of the invasion. Still, it will take around two weeks until there is concrete evidence that quantifies the lost shipments 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 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.

Separately, U.S. crude oil stockpiles are expected to have declined by 1 million bbl for the week ended March 25, with estimates ranging from a decrease of 3.8 million bbl to an increase of 2.1 million bbl. Gasoline stockpiles are expected to have fallen 1.3 million bbl from the previous week, according to analysts, while stocks of distillates are seen to have decreased by 1.2 million bbl.

Refinery use likely rose 0.2% from the previous week to 91.3% of capacity.

The closely watched survey from the American Petroleum Institute is scheduled for release at 4:30 p.m. EDT, followed by an official data from the U.S. Energy Information Administration Wednesday morning.

DTN Refined Fuels Demand data revealed that gasoline demand in the U.S. increased by 0.8% in the reviewed week and now stands roughly in line with demand levels from the same week in 2019. With most U.S. states having rapidly exited pandemic restrictions and traffic volumes seasonally stronger heading into the summer driving season, gasoline consumption is likely to remain near or above pre-pandemic levels over the next few months.

Distillate demand however continued to tumble lower, falling 5.3% during the week ended March 25 after eroding 4.5% in the prior week. Total U.S. diesel demand was down 1% year-on-year for the week and down 1.1% from the same week in 2019. The data might point to emerging weakness in U.S. diesel demand that closely correlates with economic activity, consumer purchases and international trade. It is also possible that supply chain issues related to Russia's invasion of Ukraine and COVID-related lockdowns in China could already be impacting domestic freight activity and concomitantly diesel demand.

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