DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the last trading session of May mixed, moving off intrasession highs as market participants assess the impact of an expanded Russian oil embargo on the global supply-demand balance while Organization of the Petroleum Exporting Countries reportedly plan to exempt Russia from an oil production agreement it has been a part of since April 2020.

OPEC+ oil ministers will meet Thursday (June 2) to discuss the next step in the group's production policy after European Union announced a sweeping embargo on all seaborne crude and petroleum products shipments from Russia. Although the measure excludes oil shipments carried through the southern route of the Druzhba pipeline that delivers crude to landlocked countries in Central and Eastern Europe, the embargo would cover approximately 90% of all Russian crude imports into the EU. It's worth noting that the text of the sixth sanctions package includes none of the Russian pipeline oil shipments into EU. Germany and Poland, the main recipients of Russian oil through the northern route of Druzhba pipeline, agreed in principle to phase out their imports of Russian pipeline oil.

About 2.3 million barrels per day (bpd) of Russian crude and 1.2 million bpd of petroleum products heads West through a network of pipelines and ports. Redirecting those flows would be a massive undertaking on the part of Moscow, with analysts now calling for a deeper disruption to Russian oil production this year. International Energy Agency previously forecasted Russia's output could drop as much as 3 million bpd in the second half of the year.

Faced with those headwinds, OPEC+ is reportedly considering an exemption for Russia from an oil production agreement that is unwinding steep production cuts made in April 2020 in gradual monthly installments. OPEC+ is expected to agree to a 432,000-bpd production hike for July.

The shift could open the door for Saudi Arabia and United Arab Emirates to pump more oil and export the oil into the global market, likely replacing Moscow as a main supplier to European refiners. Meanwhile, Russia will attempt to redirect the embargoed barrels from Europe into India, China, and Turkey. China has indicated that it actively engages Russia to replenish its Strategic Petroleum Reserve with discounted Russian benchmark Urals. India has also drastically ramped up its imports of Russian crude since the start of Russia's invasion of Ukraine on Feb. 26.

In financial markets, record high inflation in Europe, as well as a renewed concerns over potential recession in the United States and China has sent global equities lower on Tuesday as investors fled to safe-haven assets including the U.S. dollar and government bonds. Inflation in the Eurozone surged to an eye-popping 8.1% in the 12-month period ending in May, up from 7.4% in April and well ahead of analyst forecasts for a rate of 7.7%. The development had been expected after Germany, Spain, and Belgium all reported above-consensus figures on Monday. Germany showed a 7.9% spike in consumer prices from a year earlier compared with 7.4% reported in April. Following the data's release, U.S. dollar index advanced 0.46% against a basket of foreign currencies to finish the session at 101.766, weighing on the front-month West Texas Intermediate contract.

The U.S. crude benchmark for July delivery settled the session $0.40 lower at $114.67 per barrel (bbl) after nearly touching $120 in midmorning trading with a $119.98 print. ICE Brent crude for July delivery expired $1.17 higher at $122.84 bbl nearly three-month high on the spot continuous chart, with the August contract settling at a $7.24 bbl discount to the now expired contract.

NYMEX RBOB June futures expired at a record-high $4.0804 gallon on the spot continuous chart for a daily gain of 6.46 cents, with the July contract settling at a 16.42 cents discount to June. NYMEX June ULSD futures expired 8.8 cents higher at $4.0909 gallon, with the next-month ULSD contact finishing the session at a 15.59 cents discount to the now expired contract at $3.9350 gallon.

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