Oil Futures Gain on Russian Gas Tensions, China's Stimulus

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Except for the decline in the ULSD contract from Tuesday's record high settlement, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced in early trade Wednesday after China's central bank said it would stimulate the economy out of a COVID-19 slowdown, boosting hopes for a faster-than-expected rebound in Asian fuel consumption, while Russia's move to suspend gas deliverers to Poland and Bulgaria further exacerbated fears over European Union energy security.

EU-Russian tensions will remain in focus Wednesday after state-owned giant Gazprom confirmed it has halted gas deliveries to Poland and Bulgaria in a dramatic escalation of a conflict that stands to further rattle global energy markets. Gazprom said in a statement released Wednesday morning that it would keep those shipments turned off until the two countries agree to pay in Russia's currency, the ruble.

European gas prices initially shot up 24% on the news, which EU Commission President Ursula von der Leyen called an attempt at "blackmail." Gas flows from Russia via Ukraine are also far below levels seen earlier in April, according to the analysts, with Russia still the continent's largest supplier.

The decision will have little impact on Poland, which was already set to become independent of Russian gas by the end of this year. But it is a much bigger deal for Bulgaria, which gets more than 75% of its gas from Russia and has few immediate options to fully replace it.

Traders are now reassessing the risks of energy security for the European continent, particularly for Germany, the largest recipient of Russian gas in the EU. As of this morning, German utility Uniper SE said that it's possible to pay for Russian gas in euros while remaining in compliance with Moscow's demand for rubles. The company said it's in close contact with the German government on the issue.

Further supporting the oil complex, China's central bank said Tuesday it would use accommodative monetary policy to boost consumption in the world's second-largest economy after a COVID outbreak shut down several major cities. Shanghai has been in strict lockdowns for weeks to combat the spread of COVID-19 and 21 million residents in the capital city of Beijing are bracing for a similar shutdown. Any stimulus is thought to boost oil demand.

The International Monetary Fund warned Tuesday that Asia is now facing stagflationary risks due to rattled supply chains and China's extended lockdown. IMF cut its Asian growth outlook to 4.4% this month, down 0.5% from 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.

Wednesday's gains came despite the American Petroleum Institute late Tuesday reporting a much larger-than-expected build in U.S. commercial crude oil stocks through April 22 while detailing a sharp draw in gasoline stockpiles and a slight build in distillate fuel inventories.

API reported commercial crude oil stocks rose 4.78 million barrels (bbl) last week, well above estimates for a 600,000-bbl increase. Inventories at the NYMEX delivery point in Cushing, Oklahoma, built by 1.143 million bbl. Gasoline stockpiles dropped 3.91 million bbl in the week ended April 22, missing calls for a 100,000-bbl gain. API data show distillate inventories added 431,000 bbl, missing estimates for a decrease of 100,000 bbl.

Near 7:30 a.m. EDT, NYMEX West Texas Intermediate futures for June delivery edged higher to $101.86 bbl and June Brent gained $0.23 to $105.22 bbl. NYMEX RBOB May futures gained 1.38 cents to $3.3526 gallon ahead of expiration Friday (4/29) afternoon with the prompt spread in 2.7 cents backwardation. May ULSD contact declined 9.29 cents to $4.3750 gallon after settling at a record high $4.4679 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.

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

Liubov Georges