Oil Gains Ahead of US Retail Sales as China Reopening Eyed

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange powered higher early Tuesday while the U.S. dollar extended lower for a third consecutive session ahead of the release of U.S. retail sales and industrial production data for April. Market sentiment this week is supported by expectations for a broader reopening of the Chinese economy after months of draconian lockdowns that plunged its manufacturing sector into the worst recession since the beginning of the pandemic.

Shanghai, a city of 25 million people that has remained under strict lockdown measures since early April, reported a third consecutive day with no new COVID infections on Monday -- the first step for city authorities to begin easing quarantine controls. On Monday, China reported 1,049 new COVID cases, down from 30,000 infections a day seen over a month ago.

Under draconian lockdowns, China's economy suffered sharp contraction over the March-April period, with both manufacturing and service sectors eroding to levels not seen since the beginning of the Wuhan outbreak in February 2020. In step with plunging manufacturing output, China's refinery run rates dropped a staggering 11% in April, sending daily crude throughputs to their lowest point since March 2020. Traders bet that with China's reopening, Asian oil demand would accelerate into the summer months, potentially exacerbating global market tightness.

Little relief is expected from the OPEC+ alliance that missed an agreed-to quota in April by a staggering 2.6 million barrels per day (bpd), widening a production gap against planned output increases to 220%. More than 1.2 million bpd of that deficit came from Russia, which remains under sanctions since Feb. 24. There are still no legal impediments on transporting Russian oil, excluding the United States, United Kingdom, and Canada, which have announced phased-in bans. Many of the largest trading houses voluntarily turned away from dealing with Russian shipments. Trafigura Group and Glencore Plc, two of the world's biggest commodity merchants said in early March they won't touch new Russian business and that their activities with Russian entities would decline from the second quarter.

Over the weekend, German 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.

In financial markets, the U.S. Dollar Index extended its losses into early Tuesday to trade near 103.450 ahead of the release of U.S. retail sales for April. Consensus calls for retail sales -- a measure of spending at stores, online and in restaurants -- to rise by a seasonally adjusted 0.8% in April from the prior month despite sky-high inflation that climbed to a four-decade high 8.3%. Overall, such an increase in retail sales should be seen as encouraging, as consumers shift spending from goods into services.

Near 7:45 a.m. EDT, NYMEX June West Texas Intermediate rallied $1.21 barrel (bbl) to $115.20 bbl, and Brent crude advanced to $115.55 bbl, up $1.29 bbl. NYMEX June RBOB futures gained, trading near Monday's $4.0640 fresh record-high on the spot continuous chart, while the June ULSD contract gained 3.45 cents to $3.9420 gallon.

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

Liubov Georges