Crude extends rally; market awaits Western response after Russia invades Ukraine

Oil futures extended their rally in early US trading Feb. 24 as the market waited for Western allies to announce their response to Russia's overnight invasion of neighboring Ukraine.

At 1443 GMT, NYMEX April WTI was up $6.03 at $98.13/b and ICE April Brent was $6.75 higher at $103.59/b.

Oil futures moved sharply higher overnight after Russian forces launched widespread attacks on Ukraine following weeks of uncertainty and tension. April ICE Brent crude reached an intraday high of $105.79/b in early European trading, up 9% from the previous close, while April NYMEX WTI had crossed $100/b earlier in the day, reaching an intra-day high of $100.53/b.

Factbox: Crude prices climb as Russia 'invades' Ukraine

Oil prices were last seen at these levels in early-August 2014, when Moscow was first sanctioned by the US and Europe for interfering in Ukraine and supporting separatists in Donetsk.

NYMEX March RBOB traded 14.41 cents higher at $2.8694/gal and April ULSD was up 18.37 cents at $3.0129/gal.

A meeting of G7 leaders began at 1417 GMT, sources told S&P Global Platts. The market is anxiously waiting to see if the West will target Russia's lucrative oil and gas sector and its payment system. But for now, flows of Russia's crude, refined products and natural gas are continuing as per normal.

UK Prime Minister Boris Johnson said in a television statement on the BBC that Western allies were preparing sanctions to "hobble" Russia's economy following the overnight military escalation, adding "to that end we must collectively cease the dependence on Russian oil and gas that for too long has given Putin his grip on Western politics."

"The response from the EU and US will not focus on a military response, but on driving a liquidity squeeze as much as possible on Russia to target their ability to finance the military," TD Securities analyst said in a note. "This means we will likely continue to see very illiquid markets in anything seen as even tangentially related to Russia until investors can assess the full spillover effects of those sanctions.

S&P Global Platts Analytics does not anticipate a notable supply curtailment from Western sanctions or Russia holding back large volumes but acknowledged that the oil markets are understandably on edge due to Russia's outsized market position and 2.7 million b/d of crude exports to Europe.

"However, financial restrictions could cause temporary dislocations as buyers seek legal clarity, which would leave markets feeling even tighter," it added in a recent note.

"If sanctions affect payment transactions...supply outages cannot be excluded," said Carsten Fritsch, a commodity analyst at Commerzbank. This would include sanctions on certain Russian banks and the insurance on Russian oil and gas deliveries, he added.

Platts Analytics has said its base case demand forecast continues to assume global crude growth of 4.1 million b/d in 2022. However, under a limited incursion scenario in Ukraine, global demand growth could ease by 0.7 million b/d.

Ukraine is also an important transit point for crude into Central and Eastern Europe. The country ships Russian oil to Slovakia, Hungary and the Czech Republic via the southern leg of the key 25 million mt/year Druzhba pipeline.

Russian crude is also exported via sea through two quotes - Primorsk and Ust Luga on the Baltic Sea and Novorossiisk on the Black Sea. Russia is also a key exporter of diesel and fuel to Europe and the US.

Ahead of the attacks, US officials had signaled another potential release of crude from the country's vast Strategic Petroleum Reserve to help ease prices.

Russia, through its participation in the OPEC+ alliance, has restricted supply of crude along with Saudi Arabia and the oil-rich Gulf states to boost prices.