DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange extended lower in early trade Wednesday as investors increasingly price in the return of Iranian crude oil exports following an apparent breakthrough in multilateral nuclear talks in Vienna, where diplomats are trying to revive the 2015 Joint Comprehensive Plan of Action, with a deal likely easing pressure on low oil inventory levels in countries that are part of the Organization for Economic Cooperation and Development.

U.S. Energy Information Administration estimates industry stockpiles held by the industrialized nations in Europe, Asia and North America declined again in January to the lowest level since mid-2014. Demand has exceeded supply growth since mid-2020, according to EIA estimates, leading to six consecutive quarters of global oil inventory draws. What's more, even as a destocking pattern reverses around March-April, OECD stockpiles are unlikely to return to five-year average levels until roughly mid-2023, leaving the market vulnerable to supply disruptions and geopolitical tensions.

Against this backdrop, traders anxiously watch the latest round of talks in Vienna on Iran's nuclear program, where diplomats returned to the negotiating table on Tuesday after a weeklong break of consultations at their respective capitals. The potential deal with Tehran could lift sanctions on as much as 2 million barrels (bbl) in daily crude oil shipments, which would be a welcome development for a rapidly dwindling crude stockpiles held by OECD countries.

It is debatable how much Iran was able to export in recent months, with China a major buyer of Iranian barrels that are being sold through third party intermediaries. The country currently produces around 2.476 million bpd, still 1.5 million bpd below the 2017 output rate, a year before then President Donald Trump withdrew from the JCPOA nuclear arrangement.

The Biden Administration has come under intense scrutiny for rising gasoline prices that have rallied to seven-year highs, with the energy index expected to be the largest contributor of inflation in January. The headline inflation figure likely climbed above 7% last month -- the highest since 1982. Out of all items that are part of the U.S. consumer price index, gasoline prices posted the single largest increase last year, surging 49.8% in the 12 months ending in December. In Eurozone, inflation for January came in at a record-high 5.1%, also driven by the energy index, despite easing costs for manufactured goods.

Separately, the American Petroleum Institute reported late Tuesday U.S. commercial crude oil inventories dropped 2.025 million bbl last week, missing calls for a 500,00 bbl build. The report also showed stocks at the Cushing, Oklahoma, hub down 2.502 million bbl.

Gasoline stockpiles fell 1.138 million bbl in the week through Feb. 4 versus an estimated 1.4 million bbl build. API data show distillate inventories dropped 2.203 million bbl last week compared with an expected draw of 2.1 million bbl.

DTN Refined Fuels Demand data shows gasoline demand in the United States decreased 3% in the reviewed week and diesel demand declined 7.2%. Widespread winter storms across the United States likely weighed on fuel consumption but demand also softened in regions spared from inclement weather which might signal inflationary headwinds from higher oil prices.

Traders now await weekly inventory report from the U.S. Energy Information Admiration on tap for 10:30 a.m. ET.

Near 7:30 a.m. ET, March West Texas Intermediate futures fell $0.22 to $89.12 bbl, and Brent crude for April delivery slipped to $90.63 bbl. NYMEX March RBOB futures edged higher to $2.6320 gallon and the front-month ULSD contract traded lower near $2.7896 gallon.

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