DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange accelerated gains in afternoon trade Wednesday, with both U.S. and international crude benchmarks finishing the session 3.5% higher supported by a sharp drop in U.S. Dollar Index and rallying equities as investors parsed through the highest inflation reading in more than 40 years.

Further evidence of red-hot inflation could be found in Wednesday's release of producer price index in the U.S. -- a measurement of wholesale prices -- that climbed 11.2% in the past 12 months ending in March. On a monthly basis, PPI jumped 1.4% -- well above expectations, and the highest in the data series going back to November 2010, according to the report released from the Bureau of Labor Statistics.

PPI is considered a forward-looking inflation measure as it tracks prices to produce goods and services that eventually reach consumers. Earlier this week, Chinese manufacturers reported the highest PPI results in five months at 1.1% on a monthly basis and 8.3% year-on-year as the country grapples with cost pressures caused by Russia's invasion of Ukraine and persistent supply chain bottlenecks.

Wednesday's release comes a day after the U.S. Consumer Price Index -- a measure of inflation at the consumer level -- surged 8.5% over the past year, well above expectations, and the highest reading since December 1981.

In reaction to the data, U.S. dollar index dropped 0.37% against a basket of foreign currencies to below the 100 level at 99.913, while supporting the front-month West Texas Intermediate contract. The U.S. currency and WTI crude benchmark have an inverse relationship.

NYMEX May WTI rallied $3.65 to settle at $104.25 bbl, and the ICE June Brent contract climbed $4.14 to $108.78 bbl. NYMEX May RBOB added 13.75cts to $3.2913 gallon, and May ULSD rallied 25.40cts to a $3.7184 gallon settlement.

Wednesday' gains in the oil complex came despite the U.S. Energy Information Administration reported a much larger-than-expected build in domestic crude oil inventories and a surprising drop in refinery run rates as demand for middle distillates fell to the lowest level in 10 months.

U.S. commercial crude oil inventories spiked 9.4 million bbl during the week-ended April 8, well above market expectations for a 600,000 bbl gain. Oil stored at Cushing, Oklahoma, the delivery point for West Texas Intermediate, rose by 450,000 bbl from the previous week to 26.3 million bbl.

The larger-than-expected build came as domestic refiners slashed run rates 2.5% from the previous week to 90% of capacity compared with analyst estimates for a 0.3% increase in runs. In the week reviewed, refiners processed 15.5 million bpd, which was 424,000 bpd less than the previous week's average.

In the distillate complex, commercial inventories fell 2.9 million bbl from the previous week to 111.4 million bbl, and are now about 17% below the five-year average, EIA said. Analysts expected distillates inventories would be unchanged from the previous week. Demand for distillate fuels continued lower for the third consecutive week through April 8, falling 163,000 bpd last week to a 10-month low 3.484 million bpd.

Internationally, some 700,000 bpd of Russian oil production has been shut-in so far in April, according to estimates from Paris-based International Energy Agency, as crude exports continue to fall under pressure from international sanctions and customer-driven embargoes. The agency assumes that these losses will grow to average 1.5 million bpd for the month with more buyers shunning Russian barrels while storage tanks there quickly fill up. From May, those losses could accelerate to 3 million bpd and persist through the end of 2022.

"While some buyers, most notably in Asia, increased purchases of sharply discounted Russian barrels, traditional customers are cutting back. For now, there are no signs of increased volumes going to China, where refiners have cut runs as a recent surge in COVID cases and new restrictions have dented oil demand," said IEA in its monthly Oil Market Report released Wednesday morning.

Meanwhile, OPEC again underdelivered on its monthly production increase according to IEA estimates, increasing collective output by a mere 40,000 bpd in March compared with a planned 400,000 bpd hike, while 1.5 million bpd below its target. Output from non-OPEC+ producers, most notably the United States, also fell short of expectations at the start of the year. Non-OPEC output is now seen growing by 2 million bpd in 2022, 100,000 bpd lower than projected in last month's forecast.

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