DTN Oil

WASHINGTON (DTN) -- Reversing morning losses, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange powered higher in afternoon trade Monday, sending the U.S. crude benchmark above $105 per barrel (bbl) on the back of a growing supply shortfall among Organization of the Petroleum Exporting Countries and ten allied producers outside the cartel that are expected to approve this week another 432,000-barrel-per-day (bpd) production increase for next month despite the potential for deeper output losses in Russia -- OPEC+'s second largest oil producer.

Monday saw another session of volatile trading triggered by reports suggesting OPEC continues to badly underperform production quotas with the shortfall growing to 200,000 bpd last month, meaning the cartel was only able to raise output a little over 40,000 bpd. That does not include a production target of 200,000-bpd allocated for 10 producers outside the cartel-led by Russia, with preliminary data showing production from Russia and Kazakhstan was sharply depressed last month.

In a month-on-month comparison, Russia's oil production in the first 19 days of April was 8.2% lower than the March average, reaching around 10.11 million bpd. It could further fall to 8.74 million bpd or 17% by the end of the year as Western traders and bankers shun dealing with Russian oil, according to the country's finance minister, Anton Siluanov. The International Energy Agency forecast that almost 3 million bpd in Russian production would be turned off starting in May.

Against this backdrop, OPEC+ ministers are set to wave through the predetermined production increase in June on Thursday (5/5), with Saudi Arabia and United Arab Emirates, two countries with the spare capacity to increase their output to cover shortfalls, seeing no need to further expand their production. OPEC+ cited market uncertainty tied to China's oil demand and the extent of production losses in Russia as the reason for maintaining their gradual monthly production increase, according to reports.

"For the moment, we do not have clear visibility on the impact of the confinements in China on oil demand and on Russian production," an OPEC+ delegate was reported to have said.

China's refusal to abandon its zero-COVID policy that entails strict containment measures is fanning fears over what is viewed as a looming recession in the world's second largest economy. Beijing has begun the process of school closures along with mandatory COVID-testing for 21 million residents. In Shanghai, a city of 25 million people, authorities continue to resort to extreme lockdown measures. Analysts estimate that at least 20% of China's oil demand has been wiped out during March and April as lockdowns proliferated.

In financial markets, U.S. dollar index drifted higher in afternoon trade Monday, hitting an intrasession high of 103.775, just shy of last week's 103.950 -- a level not seen in twenty years, as investors fled to the safety of safe-haven currencies. Dollar strength is making it more expensive for overseas buyers to purchase dollar-denominated commodities such as oil.

Greenback's strength comes ahead of U.S. central bank's monetary policy meeting scheduled for Tuesday and Wednesday, which is expected to see Federal Reserve officials hike borrowing costs by 0.5%, which would be the biggest rate hike since 2000, with several more increases in the federal funds rate projected before the end of the year. The decision will be released 2 PM ET Wednesday, followed by a news conference from Fed Chairman Jerome Powell at 2:30 PM ET.

Nearly 100% of investors expect the Federal Open Market Committee to raise interest rates by 50-baisis points on Wednesday, followed by similar increases in June and July, according to CME Fed WatchTool. Some analysts are forecasting FOMC could even announce a 0.75% increase this summer as it battles a record surge in inflation. Such a move, however, could lead to recessionary pressures in the U.S. economy that unexpectedly shrank 1.4% in the first three months of the year.

On the session, NYMEX West Texas Intermediate futures for June delivery gained $0.48 to settle at $105.17 bbl, and the international crude benchmark July Brent contract advanced $0.44 bbl to $107.58 bbl. NYMEX June RBOB rallied 6.77 cents to $3.35101 gallon, and the front-month ULSD contract surged 18.77 cents to a $4.2049 gallon settlement.

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