Oil Prices Rebound as Market Eyes Russian Supply

Oil prices reversed course from Monday's $4 decline and added more than $6 on Tuesday in another bout of volatility that traders said is a sign that this market remains “nervous” about Russian supply.

Russian oil production was already down by roughly 1 million barrels per day on Apr. 10 compared to its average for the month of March, according to the latest data.

That drop mostly reflects lower refinery runs inside the country, which is set to lower refined product exports and further tighten the market, especially for diesel.

On ICE Futures, Brent for June delivery gained $6.16 on Tuesday to close at $104.64 per barrel, while May West Texas Intermediate on the Nymex in New York added $6.31 to settle at $100.60/bbl.

Product prices followed crude upward, with US gasoline prices rising 15¢ to close at $3.1538 per gallon and diesel picking up 20¢ to settle at $3.4644/gal.

Closer to Balance, For Now

The large price increase on Tuesday added $1.30 to premiums for prompt oil versus deliveries in six months, but that premium is still just below $4, compared to an average of $13 in March.

“Traders see the physical flows and see the market is more in balance,” one trader said, adding that the big price swings are being exacerbated by lower trading volumes and higher costs to trade.

But the market's newfound balance might not last long.

Bank analysts believe an average Brent price of $115-$120/bbl for the year is possible, as while the release of 240 million bbl from national strategic reserves will supply more oil to the market over the next six months, it does not address the structural shortfall resulting from underinvestment.

The market is facing “too many unknowns, too many variables in the equation,” said analysts from brokerage PVM in a note.

PVM pointed to the market dealing with uncertainty about demand in China and the US, Russian supply, a possible Iran deal, a potential European oil embargo of Russia, and the potential deployment of Opec's spare production capacity.

The market is already running short of diesel, and that continues to prop up crude oil prices. One things seems certain, PVM said: “There must be an acute shortage in middle distillates.”