Brent Falls 3% as Traders Assess Fallout from Nord Stream

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- With the exception of a fifth straight lower session for the ULSD contract, oil futures nearest delivery on the New York Mercantile Exchange

WASHINGTON, D.C. (DTN) -- Following Monday's sharp rally triggered by a surprise production cut by the Organization of the Petroleum Exporting Countries and allied producers, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange were mixed in early trade Tuesday as investors assess the economic fallout from last week's announcement that Russia is planning to permanently shut down its main natural gas pipeline to Europe.

Front-month Brent futures fell more than 3% early Tuesday in response to fresh economic data out of Germany, showing industrial orders plummeted 1.1% midsummer, bringing year-over-year contraction in the EU's largest manufacturing economy to 13.6%. These are staggering figures for Germany -- an EU powerhouse that is struggling to contain the economic hit from surging electricity and gas prices. On Monday, Dutch TTF futures once again leaped by a third before settling down 10% higher in response to Russia's announcement that its flagship gas pipeline, Nord Stream 1, with capacity to deliver 55 billion cubic meters will remain closed until the Europe Union removes all sanctions on Russia. While citing malfunctioning equipment at one of the compressor stations, Gazprom declined to reroute gas flows through functioning pipelines.

As investors braced for an expected recession in the eurozone, the Euro sank below $0.99 on Monday to its lowest level in 20 years. Stocks fell in Germany, Italy, France, and other European markets.

Markets staged a tepid rebound on Tuesday, with European equities rising in step with higher stock futures in the United States that were closed for the three-day Labor Day holiday weekend.

Against this backdrop, OPEC+ agreed on Monday to cut oil production for the first time in over a year, lowering the collective target by 100,000 bpd for the month of October. The small cut would reverse the 100,000 bpd that OPEC+ said it would add to the market last month, meaning the group's production targets will remain virtually unchanged at the August level. The decision to reverse the small production increase designed for September is more symbolic than fundamentally significant but it sends a clear signal that the alliance stands ready to defend the market should prices continue to fall. Since mid-June, the price of Brent crude, the international price benchmark, fell more than 20% from $125 to $92 bbl.

Some analysts believe the production cut is also a response to deepening lockdowns in China, recessionary risks in Europe and slowing economic growth in the United States.

Last month, OPEC downgraded its global economic growth forecast by 0.4% to 3.1% for 2022, citing ongoing geopolitical tensions and the lingering impact of the pandemic and supply-chain issues. Beijing on Monday extended COVID lockdown in Chengdu, the capital of the industrial Sichuan province and home to 21 million people, disrupting operations for several Western technology companies and automakers that have production capacity in the region. Coastal tech hub Shenzhen, which underwent mass testing this weekend, now faces tiered restrictions to slow the viral spread.

Near 7:30 am ET, NYMEX October West Texas Intermediate futures slipped $0.15 to trade near $86.70 bbl, while Brent for November delivery plummeted to $93 bbl, down more than $2.70. NYMEX October RBOB futures softened 0.46 cents to $2.4590 gallon, and NYMEX October ULSD futures rallied to $3.6280 gallon, up by 5 cents.

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

Liubov Georges