DTN Oil

WASHINGTON (DTN) -- Following an overnight rally triggered by growing signs of a deepening global squeeze on refined products, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved mixed early Monday after a string of bearish economic data out of China, the world's top oil importer, showed COVID-19 lockdowns drove industrial and consumer sectors of the economy to their lowest levels since the onset of the coronavirus pandemic in early 2020.

China's industrial output declined 2.9% in April, missing forecasts for a modest 0.5% increase to mark the first contraction in Asia's industrial powerhouse since February 2020. A combination of quarantine measures, insufficient global demand and rising costs are among the many factors weighing on China's manufacturing sector, according to a statement from National Statistics Bureau Spokesperson Fu Linghui.

In step with the decline in industrial output, China processed 11% less crude oil in April, with daily throughput falling to the lowest point since March 2020. Worth noting, China's manufacturing activity slipped into contraction in April as health authorities beefed up COVID lockdowns on Shanghai and Jilling.

As a result, the unemployment rate in China's 31 largest cities climbed to 6.1% in April, the second highest unemployment rate since a 6.2% peak during the onset of the COVID 19 pandemic in February 2020. The jobless rate among those aged 16 to 24 was nearly three times higher at 18.2%. Further evidence of contraction could be found in retail sales data that slumped for the second month in April, down more than 11% compared with a 3.5% drop reported in March. Within retail sales, only beverages, medicine, food and petroleum products saw year-on-year growth.

Against this backdrop, calls for relaxed COVID controls and financial stimulus to prop up the economy grew louder in China. Shanghai officials said on Sunday that, beginning on June 1, the city would work toward restoring normalcy if a rebound in new COVID cases is avoided. Wire services reported Shanghai will gradually reopen businesses such as shopping malls as customers will be allowed to shop in "an orderly way," while hair salons and vegetable markets will reopen with limited capacity, Vice Mayor Chen Tong said during a media briefing on Sunday.

Despite some tentative signs of improvement, analysts now warn China's current downturn may be harder to shake off than the one seen during the onset of the coronavirus pandemic in early 2020, with exports unlikely to swing higher and policymakers limited in their stimulus options.

Limiting downside for the oil complex, Germany's government announced a plan to completely phase-out Russian oil imports by the end of the year even if a broader European Union 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 bpd, 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.

Diesel cars account for a bigger chunk of the European auto fleet, with prices in the wholesale market having surged 88% over the past year. The availability of the fuel is likely to worsen as sanctions on Russia tighten, further exacerbating a global squeeze on refined products.

Near 7:30 a.m. EDT, NYMEX June West Texas Intermediate dropped $1.10 barrel (bbl) to near $109.40 bbl, and Brent crude slid to $110.25 bbl, down $1.38 bbl. NYMEX June RBOB futures were up modestly after rallying overnight to a $4.0111 fresh record high on the spot continuous chart, while the June ULSD contract declined 6.95 cents to $3.8517 gallon.

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