DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced more than 3% early Tuesday, lifting the international crude benchmark above $124 barrel (bbl) after the European Union agreed to ban all seaborne shipments of Russian crude and petroleum products until the end of the year, accounting for about 90% of all Russian oil exports to the EU.

Excluded from the ban are oil shipments through the southern route of the Druzhba pipeline that delivers crude to the landlocked countries of Slovakia, Hungary and Czech Republic. Germany and Poland that receive some of their oil from the northern route of the Druzhba said they have agreed to halt those shipments until the end of the year as a response to Russia's continued aggression in the Ukraine.

"This immediately covers more than 2/3 of oil imports from Russia, cutting a huge source of financing for its war machine," tweeted President of the European Council Charles Michael.

About 2.3 million barrels per day (bpd) of Russian crude and 1.2 million bpd of petroleum products head 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.

Interestingly, some Russian oil executives called on the government of President Vladimir Putin to announce mandatory cuts to oil production in a move that would raise prices further to avoid selling barrels at a discount. Leonid Fedun, vice president of Russian oil company Lukoil said Russia should cut oil production by 20% to 30% this year to 7 million to 8 million bpd to "stay in the business."

Based on Bloomberg calculations, Russia's current production is below 10 million bpd at around 9.16 million bpd, and more than 1 million bpd below its quota under an OPEC+ production agreement.

IEA Executive Director Fatih Birol said this morning the energy crisis is much bigger than the 1970s oil shocks, and that he expects it to last longer. The Russian oil embargo also heightened concerns over inflation and potential recession across the 27-nation economic bloc. Inflation in the Eurozone surged to a new record high 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 Monday. Germany showed a 7.9% spike in consumer prices from a year earlier compared with 7.4% reported in April.

Next, oil traders will switch their focus to OPEC+'s meeting scheduled for Thursday (June 2) that is expected to deliver a modest 432,000 bpd production increase in July. Western nations have repeatedly asked OPEC+ to increase production more aggressively amid a tightening global oil market. Rebuffing those calls, Saudi Aramco's Chief Executive Amin Nasser reiterated last week that "effective spare capacity" currently 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 last week. Russian Foreign Minister Sergey Lavrov is set to meet with Saudi Arabian Crown Prince Mohammed Bin Salman on Wednesday ahead of Thursday's meeting by OPEC+ ministers.

Near 7:30 a.m. EDT, U.S. crude benchmark for July delivery rallied $2.83 to trade near a $118.39 barrel (bbl) after trading at a nearly three-month high at $119.43. ICE Brent July futures advanced $2.24 to $121.67 bbl ahead of its expiration this afternoon while rallying to a $124.10 nearly three-month high, with the August contract trading at a $4 bbl discount to the expiring contract. NYMEX RBOB June futures traded at a record high $4.1930 ahead of expiration, with the July contract trading at an 11-cent discount. NYMEX June ULSD futures surged 20.87 cents to $4.2116 gallon, with the next-month ULSD contact trading near $4.1332 gallon.

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