DTN Oil

WASHINGTON (DTN) -- Reversing earlier losses, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied in afternoon trade Monday, sending the international crude benchmark to a seven-week high $114.24 per barrel (bbl) settlement amid a one-two punch of heightened geopolitical tensions in Europe after Sweden and Norway made a formal decision to join the North Atlantic Treaty Organization, and the potential for a broader reopening of China's economy that is expected to boost oil demand this summer.

China's economy suffered sharp contraction in April, with both manufacturing and service sectors eroding to levels not seen since the beginning of the Wuhan outbreak in February 2020. As COVID controls tightened the grip over China's major cities and mobility came to a standstill, refinery run rates plunged a staggering 11% in April, sending daily crude throughputs to their lowest point since March 2020. On the national level, industrial output declined 2.9% in April, but was isolated to Shanghai and Jilling -- the two areas most affected by the COVID lockdowns, with contraction for the two regions closer to 30%. Meanwhile, unemployment rate in China's 31 largest cities climbed to 6.1% in April, the second highest jobless rate since a 6.2% peak during the onset of the COVID 19 pandemic. Not surprisingly, young people between the ages of 18 and 25 are the most affected by the loss of a job, with unemployment rates spiking to 18% among students.

Reports of social strife across China's universities likely pressured officials in Shanghai this weekend to signal the end of draconian lockdowns. Shanghai Vice Mayor Chen Tong said businesses such as shopping malls and hair salons will allow to gradually reopen next month, while consumers could shop in "an orderly way" under some restrictions. It's not clear how fast China plans to reopen the economy, but more elusive is quantifying the impact to oil supply in fueling a rebound in the world's second largest economy amid a tightening global market disposition.

In European Union, geopolitical tensions flared after Sweden and Finland made an official bid to join NATO -- a decision Russian President Vladimir Putin called "a mistake."

"We need to pay closer attention to NATO's plans to increase its global influence," said Putin during news conference on Monday.

He said the movement of troops or weapons into new NATO states would cause Russia to react. The latest twist in the security architecture for the European continent comes as Russia resorted to using its oil and gas exports as a weapon against countries it deems "unfriendly."

Last week, Russian government announced countersanctions on several private companies in Germany and Poland that receive Russian gas through Nord Stream 1 and Yamal-Europe pipeline. Both pipelines are the only alternatives to the pipeline network that runs through Ukraine which was partially shutdown by Ukrainian authorities.

Since then, Germany's government announced a plan to completely phase-out Russian oil imports by the end of the year even if a broader EU ban on Russian oil remains elusive. This month, Hungary's opposition to an EU embargo on Russian oil blocked the legislation from moving forward, with Hungary citing an outsized adverse impact on its oil-dependent economy. Other EU members in Central and Eastern Europe also asked for an extension on an embargo in an effort to diversify away from Russian oil imports.

Russian exports of naphtha, a key component in diesel production, plunged in April to just about 333,000 barrels per day, according to Bloomberg calculations using data from analytics firm Vortexa Ltd. That's the lowest export rate since at least the beginning of 2016.

Europe's imports of diesel from Russia are expected to drop following Sunday's (May 15) deadline, when sanctions on state-owned Rosneft Oil and Gazprom Neft take effect.

At settlement, NYMEX June West Texas Intermediate rallied $3.71 bbl to $114.20 bbl, and Brent crude advanced to $114.24 bbl, up $2.69 bbl. NYMEX June RBOB futures climbed to a fresh record-high settlement of $4.0229 gallon on the spot continuous chart, while the June ULSD contract declined 1.37 cents to $3.9075 gallon.

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