DTN Oil

WASHINGTON (DTN) -- After Tuesday's sell-off triggered by recession fears in the Eurozone and persistent inflation in the United States, West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rebounded higher in overnight trade after the International Energy Agency trimmed its 2022 and 2023 demand projections only modestly, citing a stronger-than-expected rebound in China and emerging markets, while warning that ongoing risks to the supply side will keep the physical market tight for the foreseeable future.

Although high fuel prices have started to dent demand in Europe and the U.S., global oil consumption is still expected to grow by 1.7 million barrels per day (bpd) this year and 2.1 million bpd in 2023, according to estimates from the Paris-based IEA. The driver behind the resiliency is a stronger-than-expected demand rebound in emerging and developing economies led by China as it starts to emerge from COVID-19 lockdowns. It must be noted, however, that persistent COVID-19 flare-ups coupled with China's "zero-COVID" policy stand to undermine this optimistic scenario. China's nationwide seven-day average infections climbed by 2,300 -- the fastest pace since May.

In Europe, it's difficult to see how a recession can be avoided as geopolitical tensions with Russia ratchet up that are worsening a growing trade deficit and surging inflation that reached a record-high 8.6% in June. Forecasts for both inflation and economic growth across the Eurozone are being rapidly revised as EU prepares itself for the potential total cutoff of Russian gas supplies. Nord Stream 1, Europe's single largest pipeline carrying Russian gas, was shut down Monday for 10 days of annual maintenance, but there is concern Russia will use the pipeline as an economic weapon. The line is scheduled to be out of action until July 21 for routine work that the operator says includes "testing of mechanical elements and automation systems," but European officials say gas flows on the pipeline might not resume.

On the supply side, IEA revised slightly higher its oil production estimates for the remainder of the year due to Russia's surprisingly strong performance. The agency raised 2022 Russia oil output forecast by 240,000 bpd to 10.61 million bpd. While world oil production is expected to grow by roughly 1.8 million bpd through December, rising short-term risks to oil output in Kazakhstan, Libya, and elsewhere have put the spotlight on spare capacity, which now is held primarily by Saudi Arabia and the United Arab Emirates. Their combined buffer could fall to just 2.2 million bpd in August with the full phase out of record OPEC+ cuts. IEA warned that global oil inventories remain critically low, with recent builds concentrated in China, where refiners reduced runs due to weaker demand amid COVID lockdowns. As an EU embargo on Russian oil is set to come into full force at the end of the year, the oil market may tighten once again.

Next, investors will parse through weekly inventory data from U.S. Energy Information Administration on tap for a 10:30 a.m. EDT release. The American Petroleum Institute late Tuesday reported commercial crude oil inventories in the United States increased 4.762 million barrels (bbl), missing calls for a 900,000 bbl draw. Stocks at the Cushing, Oklahoma, tank farm, the New York Mercantile Exchange delivery point for West Texas Intermediate futures, added 298,000 bbl. Data also show a gasoline stock build of 2.927 million bbl occurred last week versus estimates for a 900,000 bbl decrease. Distillate inventories rose 3.262 million bbl, roughly three times an expected build of 1 million bbl.

In financial markets, investors are bracing for a key reading of June inflation prior to the start of the session, with median consensus calls for last month's reading to climb to 8.8% from 8.6% reported in May which would be a new four-decade high. Some economists warn, however, that the inflation reading could come in as high as 9% due to the rise in non-energy consumer prices, such as rents and medical services. The hot inflation data will compel the Federal Reserve to keep aggressively tightening monetary policy, which has pressured stocks and broader market sentiment.

U.S. dollar pulled back slightly from a fresh 20-year high 108.420 reached Tuesday overnight, trading 0.13% lower against a basket of foreign currencies. WTI August contract gained $0.73 to trade near $96.50 bbl. U.S. crude benchmark nosedived $8.25 bbl on Tuesday for one of the largest one-day declines of the year. International crude benchmark Brent for September edged back above $100 bbl, up $0.59. NYMEX August RBOB futures declined 3.34 cents to $3.2312 gallon, while front-month ULSD advanced than 6 cents to $3.7323 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com