Oil Up as EU Mulls Russian Oil Embargo, OPEC+ Output Falls

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 powered higher in early trade Tuesday following industry reports showing crude production from OPEC+ alliance registered a net decline from February to March as sanctions-hit Russian oil exports and disruptions in Libya and Kazakhstan weighed on the group's joined crude output. Further supporting the complex, European leaders are said to be in active discussions on banning Russian oil imports in response to escalating violence in Eastern Ukraine.

After meeting with Ukrainian President Volodymyr Zelensky last week, European Union foreign policy chief Josep Borell said he would put oil sanctions on the agenda when European foreign ministers meet in Luxemburg through Tuesday. The ministers are said to consider a combination of policies, including creating escrow accounts that Russian government can access at a later point and potentially slapping tariffs on Russian oil cargos, a move that would force Moscow to lower its official selling price to stay competitive.

It has been reported Russia is selling its oil to Asian buyers at a steep discount to make up for the reputational risks associated with purchasing Russian energy. As fighting in Eastern Ukraine escalates, the EU simply might not have much else left to sanction except for Russian oil and gas exports at the detriment of its own economies.

Meanwhile, OPEC officials warned EU against such an action, citing that it would be impossible to replace some 7 million bpd in Russian crude and oil products exports. OPEC nations such as Saudi Arabia and the United Arab Emirates, key members that still have the capacity to meaningfully raise production, have rebuffed calls from major consumers like the United States to fill in the supply gap left by Russia.

More evidence of the shortfall can be found in recent surveys published by S&P Global Platts and Bloomberg, showing the first drop in OPEC+ joined output in more than a year as Western sanctions take a bite from Russian oil output. The survey found that Russian oil production averaged 10.25 million bpd in March, down from 11.45 million bpd reported in February by OPEC sources. For the month, Libya and Kazakhstan also reported a net decline amid political unrest and infrastructure-related disruptions. Official production figures will be published by OPEC's Monthly Oil Market Report later this morning.

In outside markets, U.S. inflation for March will take center stage Tuesday morning as investors expect another monthly rise in the consumer price index spurred by soaring fuel and food prices. While the price of oil has fallen below $100 on Monday from as high as $139 bbl, and along with it the cost of a gallon of gas, that drop will not be reflected in March's number.

Markets expect consumer prices to jump 1.2% in March, bringing year-on-year inflation to 8.5% from 7.9% in February. That would be the fastest rate of price appreciation since January 1982.

Higher-than-expected inflation readings support more aggressive Federal Reserve monetary policy, with a growing number of central bank officials indicating they are ready to raise interest rates by 50-basis points at the next Federal Open Market Committee meeting on May 3-4.

Internationally, China's producer price index, which measures factory inflation, increased 8.3% on an annual basis, according to government data released on Monday, threatening to exacerbate rising prices for manufactured goods worldwide. China's CPI, which tracks the cost of everyday goods and services, also rose above expectations, albeit by a modest 1.5% year on year compared with 0.9% in February.

Rising prices for everyday goods and services highlight rising challenges for the world's second largest economy that is struggling to control the latest COVID-19 outbreak. China's Premier Li Keqiang warned on Monday that China will have to step up imports of food to replenish its stockpiles in coming months which is going to put additional pressure on global inflation.

"Economic pressures are increasing. Because of lockdowns, food prices are going to rise further," said Li Keqiang.

The World Bank slashed China's 2022 growth forecast, estimating gross domestic product would grow 5% this year, down sharply from last year's 8.1% expansion rate.

China's largest COVID-19 outbreak since the beginning of the pandemic continues to spread despite extended lockdown of Shanghai's 25 million people, with restrictions weighing on its economy and straining global supply chains. Cases of COVID-19 in Shanghai have surged to 130,000 as of Monday, raising fears that the lockdown of China's largest city would continue.

"The lockdowns that are slowing oil demand in the world's second-largest consumer country threaten to persist for even longer," said Commerzbank in the statement on Monday.

The lockdowns are prompting canceled flights and movement restrictions that could cut 1.2 to 1.3 million bpd of oil demand, according to estimates from Commerzbank.

Near 7:15 a.m. ET, NYMEX May West Texas Intermediate futures advanced $3.77 to $98.06 bbl, and the ICE June Brent contract rallied $4.23 to $102.76 bbl. NYMEX May RBOB gained 6.57 cents to $3.0688 gallon, and May ULSD jumped 13.98 cents to $3.4075 gallon.

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

Liubov Georges