Brent Gains on Renewed Risk of Russian Supply Disruption

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- West Texas Intermediate futures traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced Monday, with the international benchmark climbing above $75 barrel (bbl) after Russia announced it would station tactical nuclear weapons in Belarus, escalating risks to European security and refocusing sentiment on potential disruption of Russian production and petroleum exports.

"Belarus hosting Russian nuclear weapons would mean an irresponsible escalation and threat to European security. The EU stands ready to respond with further sanctions," said EU High Representative for Foreign Affairs and Security Policy Joseph Borrel. On Sunday, Russian President Vladimir Putin announced he will move an arsenal of tactical nuclear weapons to Belarus -- a landlocked country in Eastern Europe governed by the authoritarian regime of Aleksandr Lukashenko. Putin said the move is a response to the UK's agreement to provide Ukraine with ammunitions containing depleted uranium -- a byproduct of the uranium-enrichment process needed to create nuclear weapons. While depleted uranium ammunitions are not considered nuclear weapons, their emission of low levels of radiation has led the International Atomic Energy Agency to warn of possible dangers of exposure. Meanwhile, White House National Security Council spokesman John Kirby said the United States had seen no sign that Putin had moved any nuclear weapons.

"We've in fact seen no indication that he has any intention to use nuclear weapons, period, inside Ukraine," Kirby told U.S. broadcaster CBS on Sunday.

Regardless of the motive, Russia's announcement to station nuclear weapons closer to the NATO borders marks an escalation in the Ukrainian conflict and risks further disruptions to Russian oil exports. The Kremlin said last week it would extend the unilateral 500,000-barrels-per-day (bpd) production cut, first announced on Feb. 14, until the end of June after the European Union and the G-7 imposed price caps on Russian oil and petroleum products.

The decision to cut production could be driven by Moscow's concerns about the deeply discounted prices that willing buyers such as India and China have been paying for its Urals crude. This has eroded the government's oil and gas revenues and could make it more difficult to fund the war in Ukraine. The production cut could support global oil prices but it's unclear how they might affect the large discounts on Russian oil barrels.

Monday's move higher also follows last week's steep selloff in financial markets that was triggered by turmoil in the banking sector. Shares of Germany's largest lender, Deutsche Bank, sank over 10% Friday after insurance costs against default on its bond portfolio surged to a multi-year high. Traders also fled stocks of other major European banks heading into the weekend, including France's Societe Generale and Spain's Banco de Sabadell that are believed to be systemically important to global finances.

Hence, the oil complex was once again pressured by a crisis of confidence in the banking sector and bearish macroeconomic data.

Recent data out of European Union showed industrial output in the Eurozone stagnated for a second straight month in March, with factory output falling into contraction territory at 49.9. A reading of 50 separates growth from contraction.

"Growth is very unbalanced, driven almost entirely by the service sector with manufacturing largely stalled and struggling to sustain production in the face of falling demand," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

International Monetary Fund chief Kristalina Georgieva this weekend warned of risks associated with financial instability but added that actions taken by central banks so far calmed the markets. "2023 will likely be another challenging year and global growth likely to slow to 2.9% due to inflation, the war in Ukraine, and monetary tightening ". Georgieva said at the China's Development Forum.

Near 7:30 a.m. ED, NYMEX WTI futures advanced $0.84 to $70.09 bbl, and the international benchmark Brent contract gained to $75.87 bbl, up by $0.88 bbl in overnight trade.

NYMEX RBOB added $0.0075 to $2.5960 gallon and ULSD futures for April delivery gained to $2.7123 gallon.

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

Liubov Georges