Crude Oil Rises as Looming Embargo Worsens Russian Supply Picture

© Reuters.

By Geoffrey Smith

AiVIF.com -- Crude oil prices rose again on Friday, as the market priced in increasingly severe disruptions to Russian supplies of crude and products due to western sanctions.

By 10:40 AM ET (1440 GMT), U.S. crude futures were up 2.4% at $108.74 a barrel, while Brent futures were up 2.4% at $109.85 a barrel.

U.S. gasoline futures were likewise up by 0.3% at $3.4865 a gallon.

Russian oil output has fallen by an average of nearly 1 million barrels of oil a day this month, according to Russian government data, tightening the overall global market. However, the biggest impact has been on regional markets for refined products, especially diesel, as Russian exports of the fuel that drives trucks and heavy machinery have fallen sharply. Newswire reports suggest that some 5.75 million barrels a day of Russian primary refining capacity have been taken offline due to the direct and indirect effects of finding buyers for its output.

The impact is increasing because independent trading houses are joining the more high-profile western oil and gas majors in pulling out of the Russian market. Newswires reported that the withdrawal of Trafigura, one such trading house, was a reason behind Russian oil giant Rosneft (ROSN.MM) (OTC:OJSCY) not scheduling any diesel exports from the Baltic port of Primorsk next month. Trafigura hasn't confirmed the report.

Average retail diesel prices in the U.S. hit an all-time high of $5.18 a gallon this week according to the American Automobile Association, as exports to a Europe desperately looking for substitutes for Russian fuel have tightened the domestic U.S. market.

U.S. data this week showed distillate and fuel inventories, which include diesel, at their lowest since 2008.

The U.S. is one of few producers capable of increasing output to help cushion the blow of rising prices, but quarterly results from U.S. producers suggest that it will not offset the loss of Russian barrels this year.

“There is a supply response happening,” Bloomberg reported Chevron (NYSE:CVX) CFO Pierre Breber as telling an analyst on Friday. “It’s just lagging what’s been very strong demand.”

Chevron joined smaller producers Continental Resources (NYSE:CLR), Matador (NYSE:MTDR) and Hess (NYSE:HES) in announcing plans for increased production this year, but the combined increases of less than 100,000 barrels a day on average, come nowhere near to the scale of the loss of Russian supply.

The U.S. government, in its latest Short-Term Energy Outlook, had even cut its forecast for overall U.S. production this year due to rampant cost inflation. The Energy Information Administration will announce data for U.S. output in February later on Friday, having earlier forecast monthly output at 11.532 million barrels a day.