DTN Oil

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced more than 5% on Monday, lifting the international crude benchmark above $78 bbl after Iraq halted oil shipments from the semiautonomous Kurdistan region and northern Kirkuk fields, shutting down 450,000 bbl in daily crude exports, while Russia's decision to station tactical nuclear weapons in Belarus further stoked concerns over security risk in Europe.

Supply concerns are back in focus at the start of a new trading week. On Saturday, Iraq won a longstanding case against Turkey concerning revenues derived from the sales of Kurdistan oil exports. Iraq's oil ministry "will discuss new mechanisms for exporting Iraqi oil through Turkey's Ceyhan port in a manner that guarantees exports will be sustained and international commitments met," according to a statement from the ministry.

Over 1 million barrels per day (bpd) passed through Turkey's Ceyhan terminal in January, or 1% of global supplies, with 400,000 bpd of that volume shipped from the Kurdistan region and only 75,000 bpd from Baghdad. It remains unclear when and under what agreement oil shipments would resume.

Joined with the supply disruption along the Kirkuk-Ceyhan oil pipeline, Russia announced on March 21 that it would extend 500,000-bpd production cut for March until the end of June. The decision to cut oil production could be driven by Moscow's concerns about deeply discounted prices that buyers such as India and China have been paying for its Urals crude. This has eroded Kremlin's oil and gas revenues and could make it more difficult to fund the war in Ukraine. However, the production cut could in theory support global oil prices but it's unclear how it could affect discounts on Russian oil barrels.

Against this backdrop, Kremlin announced on Sunday that it would 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 that 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. 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 NATO borders marks an escalation in the Ukrainian conflict and risks further disruptions to Russian oil production.

On the economic calendar Monday was Texas Manufacturing Survey conducted by the Federal Reserve Bank of Dallas that showed factory activity expanded modestly in March although outlook for business conditions remained deeply negative. The new orders index was negative for the tenth consecutive month at -14.3 in March, while general business activity index slipped two points to -15.7. On the positive side, Texas labor market showed some signs of employment growth along with receding price and wage pressures.

The survey offers some clues on the business outlook for Texas oil operators that have struggled in recent months with high costs of labor and equipment amid Federal Reserve's aggressive campaign to raise interest rates. The recent turmoil in the banking sector could further tighten lending conditions for the independent oil producers, leading to so-called "credit crunch." Independent oil producers account for almost 30% of the nation's output.

At settlement, NYMEX WTI futures rallied $3.55 to $72.81 per barrel (bbl), and the Brent contract advanced to $78.12 bbl, up $3.13 bbl in afternoon trade Monday. NYMEX RBOB added $0.0957 to $2.6842 gallon and ULSD futures for April delivery moved up $0.0752 to $2.7704 gallon.

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