DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange shifted higher in early trade Tuesday following reports suggesting Russia's Transneft suspended oil shipments through the southern leg of the Druzhba pipeline due to transit payment issues, halting crude exports to Hungary, Czech Republic, and Slovakia.

Transneft, a sanctioned operator of the Druzhba network, said on Tuesday an August transit fee was returned to buyers due to punishing sanctions, and that the company was working on an alternative payment scheme for the three European Union countries. The company said the northern leg of Druzhba that delivers oil to Germany and Austria is unaffected.

In March, the EU introduced a ban on transactions between European companies and Russian corporations, with Transneft being one of the companies on the sanctions list along with Rosneft, Gazprom Neft, and Russia's largest shipping company, Sovcomflot, among others.

Transactions involving the import or transportation of natural gas, oil, petroleum products and a number of metals were initially allowed as exceptions. In late July, the European Council said they would allow transactions needed for Russian state-owned oil companies to sell oil to third countries, but it remains unclear if Transneft was included on the list.

"With a view to avoid any potential negative consequences for food and energy security around the world, the EU decided to extend the exemption from the prohibition to engage in transactions with certain state-owned entities as regards transactions for agricultural products and the transport of NSE -0.39% oil to third countries," a statement from the council read.

In June, the EU introduced a sixth sanctions package against Russia that includes a partial embargo of Russian oil, banning sea shipments of crude and refined products to the EU, and prohibiting European companies from insuring sea shipments of Russian oil and oil products to countries outside the European Union. The aituation remains fluid.

Earlier this month, Russian state-owned energy giant Gazprom limited natural gas flow through the Nord Stream pipeline to just 20% of capacity, also citing issues with sanctions, delivering only 33 million cubic meters a day. Protracted disruption to European energy supplies has already pushed several large EU economies to the brink of recession, with Germany reporting no growth in nominal gross domestic product for the second quarter. The economic slowdown is likely to intensify as winter approaches and energy prices rise further in Europe, with several countries on the continent vulnerable to Russia completely cutting off gas flow.

Underpinned by uncertainty over Russian supplies and elevated demand in the EU from scorching hot summer weather, spiking natural gas prices are prompting gas-to-oil switching in power generation. This dynamic is underpinning support for ULSD futures.

In financial markets, the U.S. dollar index slipped 0.26% against a basket of foreign currencies to trade near 106.035 as traders positioned ahead of U.S. Consumer Price Index for July scheduled for release Wednesday morning. Median consensus calls for the headline inflation print to fall to 0.2% in July from 1.3% seen in the prior month, with the annual rate of increase easing to 8.7%. The driver behind an expected fall in the headline CPI print is retreating gasoline prices that fell from a peak of $5.016 gallon in mid-June to $4.033 gallon today, according to the American Automobile Association. Consensus for core CPI, however, is less than moderate at 0.5% versus 0.7% in June.

Near 7:30 AM ET, nearby month delivery West Texas Intermediate advanced $1.08 to $91.83 bbl, while the international crude benchmark Brent contract for October delivery rallied $1.20 to $97.78 bbl. NYMEX September RBOB gained 3.47 cents to $2.9235 gallon, while NYMEX September ULSD contract rallied 10.91 cents to $3.2901 gallon.

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