Oil Kicks off Q4 with Rally as Ukraine War Escalates, OPEC+

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the first session of October and the fourth quarter with sharp gains fueled by reports of a sudden escalation on the battlefields of Southern and Eastern Ukraine following a series of defeats for Russian forces, including the loss of a key city in the Donetsk region and recent setbacks in Kherson that Russian President Vladimir Putin illegally annexed less than 48 hours ago.

Unverified media reports published Monday afternoon showed a freight train belonging to the 12th Directorate of the Russian Ministry of Defense, responsible for transportation of nuclear arsenal, was moving armored personnel carriers and other military equipment across Siberia towards the frontlines of Eastern Ukraine. Although reports have yet to be confirmed by either Moscow or Washington, the headlines of such maneuvers have lifted the geopolitical risk premium embedded in oil prices as the standoff between Russia and the West enters a new phase.

On Friday, Putin illegally annexed four Ukrainian regions in the South and Eastern parts of the country, including Kherson, Zaporizhian, Donbass, and Luhansk. Ukrainian President Volodymyr Zelensky has vowed to retake the territories, while Western leaders have said they would never recognize Russia's annexation, calling the late September referendums a sham.

These developments follow another flare-up in a proxy conflict between Russia and the European Union after Gazprom suspended natural gas deliveries to Italy over the weekend, claiming it failed to receive authorization for pipeline flows through Austria. For their part, Austrian authorities said Gazprom had not signed up to changes in supply contracts required by regulatory adjustments that are made every year, and which Gazprom had known about for months. Gazprom, Austria's government, and Italian energy company Eni SpA said they were working to find a solution.

EU countries have imposed sweeping financial and trade restrictions on Russia that will get tougher later this year with the introduction of an embargo on Russian seaborne oil exports scheduled to take effect on Dec. 5.

Separately, Organization of the Petroleum Exporting Countries and allied producers are reportedly considering a sizable production cut of more than 1 million bpd when the group meets Wednesday. If agreed upon, this would be the largest reduction to OPEC+ output since April 2020 when the group slashed collective production by 9.7 million bpd to offset demand destruction brought by the global pandemic.

Russia, the group's second-largest producer, has reportedly lobbied for the larger cut as it struggles to expand its export markets under the weight of international sanctions and needs higher prices to capitalize on existing sales.

Saudi Arabia, OPEC's de-facto leader, voiced similar concerns following the recent selloff in oil futures, with the international crude benchmark Brent contract losing more than 20% of value during the third quarter. Riyadh has indicated on multiple occasions higher oil prices are required for additional investment into the energy space, pointing to limited spare capacity by OPEC+.

Analysts, however, caution that OPEC+ is currently missing its output target by 3.5 million bpd due to tight spare capacity and poor infrastructure, meaning a 1 million bpd reduction would likely translate into only a 400,000-bpd decline in actual oil output.

At settlement, November West Texas Intermediate futures spiked more than $4 to $83.63 bbl, and ICE December Brent futures rallied to $88.86 bbl, up $3.72. NYMEX November RBOB futures advanced 14.31 cents to $2.5129 gallon, with the front-month ULSD futures surging 14.75 cents to $3.3691 gallon.

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

Liubov Georges