Oil prices surged again Wednesday, with the CME ultra low sulfur diesel contract settling at its highest level since the end of July 2008.
Markets are continuing to react to a scenario that wasn’t on many forecasts of what might happen in the event of a Russian invasion of Ukraine: a self-selected embargo in which sanctions by the West on Russian imports to key countries so far are proving unnecessary.
In ULSD trading on CME, the front-month price for April barrels settled at $3.4947 a gallon, an increase of 34.36 cents a gallon, or 10.9%. The outright increase is believed to be the highest one-day move in the history of the contract, which traded heating oil before becoming a diesel contract as heating oil and diesel specifications mostly aligned.
The settlement was also just below the highest trade of the day at $3.5001, a signal that the market was moving higher as the day went on.
The aversion to Russian crude and products isn’t even limited to exports from that country. For example, CPC Blend is the benchmark crude from Kazakhstan. S&P Global Commodity Services (SPGCS), which includes the Platts oil reporting activities, assessed CPC Blend at its lowest level relative to the dated Brent benchmark in almost two years.
Although the oil is produced and blended in Kazakhstan, it is exported from the Russian port of Novorossiysk.
“Vessel owners and Western firms most certainly care which load port they’re going to,” SPGCS quoted a trader as saying.
The self-sanctioning could also be seen in the weekly statistical report from the Energy Information Administration. It reported that Russian crude oil imports into the U.S. for the week ended last Friday had declined to zero.
That figure is not by itself unusual. It was zero in the last week of 2021 and the first three weeks of 2022. It also came in at zero four other times in 2021. And before October 2020, it had been zero every single week since early 2013.
How long the world can continue to shy away from Russia is the primary question in the market. According to the BP Statistical Review released last year, Russia exported on average 8.38 million barrels a day in 2019, the last pre-pandemic year, and 7.43 million barrels a day during the lower-demand year of 2020.
While not all of that is at risk — for example, early reports have said the Druzhba crude pipeline that runs through Ukraine and takes Russian crude into Eastern Europe was still operating — it appears questionable that there are other sources of oil that could make up a significant drop in Russian exports for a lengthy period; that’s one of the key reasons oil is so much higher.
John Kemp, who covers oil and energy for Bloomberg Opinion, said in a column Wednesday morning that traders believe at least 2 million barrels per day of Russian crude exports are failing to find a home.
The most significant action taken in response to the self-imposed loss of Russian oil supplies is a decision by Western countries operating under the banner of the International Energy Agency to release 60 million barrels of crude from their respective strategic stocks.
Criticism of the move has focused on the fact that the 60 million barrels doesn’t cover even one day’s worth of global consumption. But the IEA, in its most recent report, noted that stocks in Organization for Economic Cooperation and Development nations in December fell by 60 million barrels, which it described in its monthly report as “steep.” Viewing the new supplies coming out of strategic stocks as inventory replenishment rather than a one-for-one supply directly into consumption shows the significance of the move.
According to the ULSDR.USA data stream in FreightWaves’ SONAR, wholesale diesel prices by Wednesday morning were up more than 30 cents from the beginning of the week, coming in at an average of $3.305 a gallon.
Tom Kloza, a well-known oil analyst from OPIS, which is a key source of wholesale data, tweeted midday Wednesday that wholesale prices being posted intraday were showing significant gains.
In other supply chain-related developments impacted by the Russia invasion of Ukraine:
LNG by rail to the rescue?
U.S. liquefied natural gas exports to Europe set a record in January, and they are going to be looked to as a key source for filling any hole left by a loss of Russian natural gas shipments to Europe (which are not specifically sanctioned yet). However, there has always been controversy about the safety of rail shipments of LNG.
Railway Supply Institute spokesperson John Hebert jumped into the fray with the release of this statement: “If Europe ends up facing an even bigger energy crisis as a result of this, we should be looking at how the United States can increase exports to help mitigate shortages in Europe. As part of that, we’ll also be urging the Biden administration to reconsider its decision to suspend the safe transportation of liquefied natural gas by rail to help expand our export capacity of LNG.” — Joanna Marsh
DOT’s Buttigieg offers support to Ukraine
Transportation Secretary Pete Buttigieg confirmed at a Senate committee hearing on Wednesday that just before President Joe Biden’s State of the Union address, he spoke with Ukrainian representatives on what role the Department of Transportation might play as the Russia-Ukraine situation unfolds.
“This is a theme of a conversation I had late yesterday afternoon with my counterpart the Ukrainian minister of infrastructure, as well as their ambassador to Washington,” Buttigieg testified before the Senate’s Environment and Public Works Committee, responding to a question from the committee’s ranking member, Shelley Moore Capito, R-W.Va.
“One of the things we discussed was something that [Ukraine] requested, which the president announced last night: the closure of the U.S. airspace to Russian aircraft. There may be other steps that would be appropriate that are within our authorities. Obviously this situation is fast unfolding, so we’re moving quickly to assess them. But I do think there are a number of things with regard to infrastructure, and certainly with regard to travel, that we need to look at as a way to make good on our commitment to support the Ukrainian people.”
Buttigieg added that he is also “in frequent contact with many of my counterparts among our allies and partners to look at what they’re doing, and what we might be doing and how best to coordinate.” — John Gallagher
Slowing commodity exports
Container vessels are experiencing departure delays at ports in the Netherlands, Belgium and Germany as authorities conduct searches for restricted commodities, primarily dual-use technologies, that the U.S. and European Union banned from export to Russia under new licensing requirements. The inspections cover export and transshipment cargo, according to shipping line Maersk. — Eric Kulisch
Shutting down the assembly line
Toyota said it has stopped production of RAV4 and Camry models at its St. Petersburg assembly plant. It also closed all retail sales locations in Russia. — Eric Kulisch
In other FreightWaves coverage of the Russian invasion of Ukraine: