WASHINGTON (DTN) -- With the U.S. dollar holding recent gains in early trade Tuesday, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved lower in tandem with softening equities as investors refocused on a slowing economy in China and deceleration of economic growth across emerging markets tied to surging prices for essential food and fuel imports.
The World Bank on Monday downgraded global economic growth this year to 3.2% from 4.1% seen at the start of the year, as record levels of inflation and Russia's invasion of Ukraine continue to weigh on the economic outlook. The single largest factor in the reduced growth forecast was a projected contraction of 4% across Europe and Central Asia, according to World Bank President David Malpass, because of disruptions to trade and logistics brought about by the war. In particular, Russia, ranked as the world's 11th largest economy prior to the Feb. 24 invasion, is seen contracting by 11% this year, which would mark the steepest deceleration of growth since 1994.
Russia's Central Bank more than doubled its key interest rate to 20% on Feb. 28 as the first wave of Western sanctions hit before the bank trimmed rates to 17% on April 8. The bank is expected to lower the rate further at its next board meeting on April 29 to ease the flow of credit to Russian businesses and economy. While speaking to the Russian state legislatures, the head of Russia's Central Bank, Elvira Nabiulina, said this summer Russia will need to find new business models to overcome a supply shock created by the international sanctions.
"Russian manufacturers will need to search for new partners, logistics, or switch to production of products for previous generations," she added.
Despite early losses, sentiment in the oil market remains supported by the growing possibility of a European Union-wide embargo on Russian oil imports and unplanned supply outages in Libya, where violent protests shut-in nearly half of the country's 1.2 million barrels per day (bpd) of oil production.
Analysts forecast Libya's oil production could fall by as much as 1 million bpd in coming days after demonstrations closed off the nation's largest oil field, El Sharara, with daily production capacity of 300,000 barrels (bbl). The closure of smaller oil fields of El Feel, Nafoora and Abu Al- Tilf has led to the loss of an additional 200,000 bpd, effectively shutting down operations at the key export ports along Libya's Mediterranean coast.
Tribal leaders in charge of the protests demand the ouster of the country's prime minister, Abdul Hamid Dbeibah, and the head of Libya's National Company, Mustafa Sanalla, who has been in control of state-owned oil giant since 2014. Sanalla, an ally to the West in Libya's power struggle to control the nation's vast natural resources, has been engaged in a bitter tug of war with Mohamad Aoun, the country's minister of oil, who has the backing of Libya's opposition forces in the south. The situation is unlikely to find an immediate resolution.
Meanwhile, European leaders are said to be working on a sweeping ban of Russian oil imports as part of the next sanction package in response to Moscow's offensive in eastern Ukraine. Russia's Foreign Minister Sergei Lavrov confirmed Tuesday that the second stage of the "special military operation" has begun, with the aim to take over Donbass and Lugansk regions where pro-Russian separatists have been fighting the Ukrainian army for the past eight years.
"The European Union is spending hundreds of millions of euros on importing oil from Russia, that is certainly contributing to financing this war. We need to cut off that financing ... the sooner that can happen the better," said Irish Foreign Minister Simon Coveney.
Data from the U.S. Energy Information Administration showed in 2021 EU bought 2.3 million bpd of Russian oil -- almost half of Russia's exports.
Dependence on Russian oil varies widely across the bloc, with countries such as Bulgaria almost totally dependent on Russian oil. Hungary has already said it cannot support an oil embargo.
Near 7:30 a.m. EDT, NYMEX May West Texas Intermediate fell $1.42 to trade near $106.79 bbl ahead of expiration Wednesday afternoon, with the next-month June contract narrowing its discount to $0.55 bbl. ICE June Brent futures fell a like amount to near $111.65 bbl. NYMEX May RBOB futures fell 5.28 cents to $3.3253 gallon, and May ULSD contract declined 3.69 cents to $3.8539 gallon.
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