Oil Rallies After Rate Hike and Looming Russian Oil Embargo

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearby-month delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange accelerated gains in afternoon trade Wednesday, sending both crude benchmarks as much as 5% higher. The moves came after the U.S. Federal Reserve raised interest rates by 50 basis points -- the most since 2000 -- to quell surging inflation that stands to undermine demand growth domestically and globally at a time when the European Union moved to phase-out Russian imports of oil and refined products.

European Commission on Wednesday finalized a sixth package of economic sanctions against Russia for its invasion of Ukraine. In a major policy shift, the majority of the EU member-states agreed to phase-out Russian oil imports in measured steps that would require a six-month transitional period for crude oil and a 12-month period for petroleum products, including gasoline and diesel fuel.

Hungary and Slovakia are the only two members of the 27 EU countries that were granted an extended period until the end of 2023 due to their high dependency on Russian energy supplies.

"We see no plan or guarantees in the current proposal to manage even a transition period nor what would guarantee Hungary's energy security," said Zoltan Kovacs, a spokesman for the Hungarian government.

Acknowledging the risks, German Economy Minister Robert Habeck said that he cannot guarantee that regional supplies will not be disrupted but believes the EU transitional period is adequate.

The issue at stake is that there is currently not enough global spare capacity to entirely replace Russian oil supplies. Of the 10.1 million bpd of crude oil that Russia produced in 2021, it exported more than 45% or 4.7 million barrels per day (bpd). The majority of Russia's crude oil and condensate exports, nearly half of Russia's total exports, are typically sent to Europe. For Russia, it's highly unlikely China and India, Asia's largest importers, could replace the lost export demand from Europe.

In financial markets, U.S. Federal Open Market Committee on Wednesday approved a rare 0.5% increase in overnight borrowing costs, bringing the central bank's benchmark federal funds rate to a target range between 0.75% and 1%. This marked the most aggressive monetary policy tightening in decades, which is aimed at rapidly reducing the pandemic-era stimulus that has contributed to rising price pressures across the U.S. economy.

FOMC, which usually lifts interest rates in 0.25% increments, last raised rates by 0.5% in 2000. In a statement released Wednesday afternoon, FOMC said it "anticipates that ongoing increases in the target range will be appropriate," setting the stage for another large rate hike at the Fed's meeting next month on June 14-15.

Further supporting the oil complex, U.S. Energy Information Administration inventory report on Wednesday revealed a much larger-than-expected drop in domestic fuel stocks as demand gasoline and diesel picked up in recent weeks. Distillate stocks currently stand at the lowest level in over 14 years and some 22% below the five-year average at 104.9 million barrels (bbl).

EIA said domestic refiners processed 15.5 million bpd of crude oil during the final week of April, 218,000 bpd lower compared with the previous week's processing rate. The refining capacity utilization rate unexpectedly fell 1.9% from the previous week to 88.4% compared with consensus among analysts for a 0.4% increase.

U.S. commercial crude stockpiles rose by 1.3 million bbl to 415.7 million bbl and are now about 15% below the five-year average. Analysts expected crude stockpiles would fall by 200,000 bbl from the prior week. Oil stored at Cushing, Oklahoma, the delivery point for U.S. stocks, increased 1.4 million bbl from the previous week to 28.8 million bbl. U.S. crude oil production remained unchanged at 11.9 million bpd.

At settlement, NYMEX West Texas Intermediate futures for June delivery advanced more than $5 to $107.81 per bbl, and the international crude benchmark July Brent contract topped $110 bbl, up $5.17. NYMEX June RBOB rallied 15.11 cents to a $3.6523-per-gallon settlement, and the June ULSD contract spiked 11.43 cents to $4.1970 per gallon.

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

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

Liubov Georges