DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved mixed in early trade Friday. All petroleum contracts are on track for solid weekly gains amid reports suggesting the European Union is set to announce an embargo on Russian oil imports early next week, although likely to exclude shipments on the Druzhba pipeline in a major compromise with Hungary and Czech Republic. The Organization of the Petroleum Exporting Countries is seen agreeing on a modest production increase for July despite a widening supply deficit on the global oil market.

OPEC+ is set to stick to an oil production deal agreed to last year that would raise July output targets by a modest 432,000 barrels per day (bpd) when meeting on June 2, according to OPEC+ delegates. The planned production increase continues to return output to pre-pandemic rates, with OPEC+ sharply cutting production in response to the pandemic in the second quarter 2020. Those cuts are set to be fully unwound by the end of September, but the group's oil output has remained consistently below their monthly targets with several member states seen to have reached their production ceiling earlier this year. Saudi Arabia and United Arab Emirates are believed to be the only OPEC+ members that could meaningfully raise output.

Rebuffing calls from Western nations for the alliance to raise its production more aggressively, Saudi Aramco's Chief Executive Amin Nasser reiterated this week that "effective spare capacity" stands at just 2% or 2 million bpd. Spare capacity is the amount of untapped production that can be quickly turned on.

"You need a resilient and strong spare capacity to make sure that you can absorb any supply shocks," Nasser said this week.

Exacerbating those concerns, Russian oil production is projected to fall by 5% to 8% this year, according to the country's oil minister Alexander Novak, as Western sanctions continue to hammer crude exports. According to analysts, Russia's oil output could shed as much as 3 million bpd in the second half of the year.

The sanctions will continue to affect production trends longer term as there is virtually no chance the sanctions on Russia would be lifted anytime soon. As of mid-May, Russia's oil production was 830,000 bpd lower than in February. Rosneft -- the top producer and refiner in Russia -- accounted for 560,000 bpd of this decline, according to Bloomberg who cited Russian ministry data. This means that Russia's current production is below 10 million bpd at around 9.16 million bpd, according to Bloomberg calculations, and more than 1 million bpd below its quota under the OPEC+ production recovery agreement.

Amid the grim outlook for Russia's oil industry, the European Union is set for another round of talks early next week to push through its latest sanctions package against Russia. In a major compromise with Hungary who is opposing the measure, European Union is expected to temporary exclude oil shipments via the massive Druzhba pipeline to give landlocked member states more time to diversify from Russian oil. Media reports indicate Hungary is pressing for about 750 million euros to upgrade its refineries and expand a pipeline from Croatia to enable the switch.

Germany's Economy Minister Robert Habeck indicated the new deal could be reached within days or look to "other instruments" to limit imports of Russian oil if no agreement is reached. Last month, EU proposed a phased-out approach to banning Russian oil imports, with several states including Hungary, Slovakia, and Czech Republic having been granted a longer period to transition away from Russian oil. Even without a formal ban, there is less Russian oil available to the market as buyers and trading houses avoid dealing with crude and fuel suppliers from the country.

Near 7:30 a.m. EDT, July West Texas Intermediate futures slipped $0.47 to $113.63 barrel (bbl), and ICE July Brent crude softened $0.17 to $117.23 bbl. NYMEX June RBOB rose 0.18 cents to $3.8863 gallon, while front-month ULSD declined 2.73 cents to $3.9407 gallon.

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