Oil Futures Rally on US Sanctions Enforcement, Low Runs

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures closest to expiration on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced for the fourth consecutive session Thursday, rallying as U.S. Treasury took enforcement action on four entities for violating the price cap on Russian oil sales while products surged on low refinery utilization in the United States.

U.S. Treasury Department's Office of Foreign Assets Control imposed sanctions on four entities and identified one vessel as "blocked property" in what it said was a network in a "price cap violation scheme in late 2023."

A coalition of G7 countries set a price cap of $60 bbl on Russian oil exports in December 2022 with the goal of reducing Moscow's revenue for its invasion of Ukraine in February 2022 while keeping its oil flowing to avoid a global shortage that would stoke inflation. Today's action involved United Arab Emirates-based Zeenit Supply and Trading DMCC that "sold Russian Urals crude oil in November 2023 that was priced at over $80 per barrel that it delivered using the vessel NS Leader." The tanker, registered in Liberia, "made five port calls in Russian ports in 2023."

Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said, "Today's action against vessels violating the price cap on Russian oil should serve as a continued warning that we can and will enforce violations of the cap."

The enforcement action added to a reaccelerating geopolitical risk premium in oil prices that had eased late last week on hope a ceasefire agreement in the Israeli-Hamas War in Gaza would be reached. Instead, Israel rejected the latest proposal in what Prime Minister Benjamin Netanyahu called "delusional" demands by Hamas leadership, with Israel's position appearing to harden. Additionally, the United States killed the commander of the Iranian-backed Kataib Hezbollah militia in Baghdad in a drone attack Wednesday in retaliation for a drone attack by the militants on a U.S. base in Jordan that killed three U.S. service members.

The geopolitical incidents bolstered crude prices despite building inventory in the United States amid low refinery utilization. Energy Information Administration on Wednesday reported commercial crude inventory increased for a second week through Feb. 2, up 6.754 million bbl since Jan. 19, building in large part due to a falloff in refinery runs. The U.S. refinery run rate was 82.4% of capacity during the week ended Feb. 2, a 13-month low, and will likely continue to slip amid an unplanned outage at BP's 435,000 bpd Whiting Refinery located in northern Indiana.

BP said it was making progress in restoring normal operations at the refinery, the largest in the Midwest, while a Reuters report suggested the refinery could be shut for as many as three weeks as it investigates the cause of a power outage that forced a systemwide shutdown. In PADD 3, the refinery run rate continued lower for a fourth consecutive week through Feb. 2, declining to 77.1% utilization -- a 29-month low.

The falloff in refinery runs prompted gasoline stocks to be drawn down for the first week in six, down 3.146 million bbl from a 35-month high 254.134 million bbl. Distillate stocks fell for the third straight week through Feb. 2, down 7.179 million bbl or 5.3% since Jan. 12 to 127.574 million bbl, widening a stock deficit against the five-year average to 9.564 million bbl or 7%.

Bank of America Global Research said in a note to clients that winter refinery maintenance appears to be the highest in several years, and "expect to clean up elevated winter grade [gasoline] inventories."

NYMEX March RBOB futures rallied to a $2.3450 11-week high on the spot continuous chart ahead of settlement at $2.3420 gallon, up $0.0790. March ULSD futures surged to a $2.8979 10-week spot high intrasession, settling with a $0.0756 gain at $2.8908 gallon.

Both NYMEX March West Texas Intermediate and ICE April Brent futures posted one-week highs at $76.59 and $81.90 bbl, respectively, with WTI futures settling $2.36 higher at $76.22 bbl. The Brent contract ended the session with a $2.42 gain at $81.63 bbl.

Brian L. Milne can be reached at brian.milne@dtn.com.

Brian Milne