DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied more than 3% in afternoon trade Tuesday, with both crude benchmarks retracing Monday's losses on reports of Russia halting gas supplies to Poland in a sign of major escalation in the standoff over Ukraine after the German government indicated an embargo on Russian oil imports is feasible.

Poland's main gas supplier, PGNiG, confirmed on Tuesday gas flows through Yamal pipeline with a daily capacity of 24.6 million cubic meters has been suspended, shuttering a vital artery for gas shipments into the European Union. European gas prices surged as much as 17% in late afternoon Tuesday as traders calculated the risk of other European countries being hit next. The threat of cutoff has loomed for weeks after Russian President Vladimir Putin demanded gas payments in Russia's national currency the ruble.

Polish Prime Minister Mateusz Morawiecki furthered that his government received threats from Gazprom that unless Poland paid for Russian supplies in rubles, gas shipments would be stopped.

Last year, PGNiG imported 9.9 billion cubic meters of Russian gas under long-term contracts, meeting around 63% of Poland's demand. Poland will be able to replace Russian gas imports with Norwegian gas once the Baltic Pipe natural gas pipeline with capacity of 10 bcm connecting Norwegian gas networks with Polish and Danish markets comes online in October.

Interestingly, the cutoff comes hours after German Economy Minister Robert Habeck suggested Russia's oil embargo is now manageable for Germany, with Germany the largest importer of Russian oil and gas in the European Union. If realized, the development would mark a major reversal of Germany's position on imports of Russian energy imports.

Limiting the upside for the oil complex are concerns over larger-than-expected economic slowdown in China due to prolonged and more widespread lockdowns which are causing a deeper slump in personal consumption and investments that are leading to heightened stagflationary risks for Asian region. International Monetary Fund cut its Asian growth outlook to 4.4% this month, down 0.5% from its previous projections made in January, with most of the decline attributed to China's COVID shutdowns and deepening supply shock in the region.

"Therefore, the region faces a stagflationary outlook, with growth being lower than previously expected, and inflation being higher," said Anne-Marie Gulde-Wolf, acting director of the IMF's Asia and Pacific Department.

China is now facing a deeper economic contraction then was forecasted just a month ago, with Shanghai -- the nation's financial hub, remaining in lockdown for over four weeks while Beijing's 21 million residents are now being mass-tested after a cluster of cases were discovered in the city's most populous district and home to embassies and many foreign multinationals.

At settlement, NYMEX West Texas Intermediate futures for June delivery advanced $3.16 to $101.70 bbl, and June Brent rallied $2.67 to $104.99 bbl. NYMEX RBOB May futures gained 9.9 cents to $3.3388 gallon ahead of expiration Friday (4/29) afternoon, with the prompt spread settling at 2.78cts backwardation. May ULSD contact rallied 37.70 cents to $4.4679 gallon -- a record high settlement on the spot continuous chart, spiking on a tight distillate market, with U.S. distillate stocks last measured at 108.735 million bbl, the lowest stock level since May 2008, while 20% below the five-year average. June ULSD futures settled at a 65.06 cents discount to the May contract, which expires Friday afternoon.

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