DTN Oil

WASHINGTON (DTN) -- After Thursday morning selloff triggered by concerns over a potential U.S. recession, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange turned positive to settle Thursday's session with gains between 2% and 3% as investors refocused on tightening fuel supplies in the United States, with nationwide distillate inventories drawn down to their lowest level in 14 years.

Global commodity markets continue to suffer from persistent fuel shortages in the United States, Europe and Asia as economies bounced back from pandemic restrictions this year. Domestically, inventories of distillate fuels that are primarily used in manufacturing, shipping and construction fell to 105 million barrels (bbl) -- the lowest level since the summer of 2008 that was quickly followed by the onset of the great financial crisis and recession. Similar trend can be observed in Europe where distillate stocks also fell to a 14-year low 378 million bbl in April.

China doesn't publicly disclose the size of its product and crude inventories, but wire services report that Beijing is actively engaging Moscow to buy additional oil to replenish its dwindling petroleum stocks. Refiners in China have been quietly buying Russian crude since the invasion, even as a COVID-19 resurgence dents consumption in the world's biggest crude importer. China's oil demand last month slumped 6.7% year-on-year as strict lockdowns confined millions to their homes. Kpler estimates China's overall crude stockpiles stand at 926.1 million bbl, up from 869 million bbl in mid-March -- but still 6% lower than a record in September 2020. By comparison, the U.S. Strategic Petroleum Reserve currently holds about 538 million bbl.

Also lending price support, Wednesday's weekly report from the Energy Information Administration which revealed U.S. commercial crude oil inventories fell to their lowest point since January 2005 and gasoline stocks eroded to a fresh one-year low ahead of the summer driving season, with demand for the motor transportation fuel topping 9 million barrels per day (bpd) last week. Refinery crude throughputs climbed above the five-year average for the first time in a month as refiners processed over 15.9 million bpd, which helped ease concerns over a crunch in gasoline and diesel supplies.

Earlier in the session, oil complex came under selling pressure from investor concerns over a potential recession looming over the U.S. economy with decades-high inflation and an aggressive rate hike trajectory laid out by the Federal Reserve seen slowing growth. Major U.S. retailers, including Target and Walmart, reported on Wednesday their profit margins are being squeezed by surging fuel prices and supply chain bottlenecks. The country's two largest retailers suffered their biggest single-day declines since 1987 this week, with Target losing around a quarter of its value in Wednesday's carnage. However, macroeconomic indicators for the U.S. economy still show little sign of recession, with consumers spending at a rapid clip and industrial output regained momentum this spring. U.S. Treasury Secretary Janet Yellen said Thursday that she believes the Federal Reserve can achieve a soft landing, but it would take some skill and luck.

"The Fed must decide how to achieve it," said Yellen.

The Federal Reserve, for its part, has said it won't stop hiking the federal funds rate until there is "clear and convincing" evidence that inflation is slowing, according to comments earlier this week from Fed Chairman Jerome Powell. Investors are still pricing in an 85% chance of a 50-basis point hike next month, according to the CME Group's FedWatch tool, as well as an 84.7% chance of a similar move in July.

West Texas Intermediate June futures rallied $2.62 to $112.21 bbl after hitting an intrasession low of $105.13 bbl, and the July contract settled at more than $2 discount ahead of the June contract's expiration Friday afternoon (May 20). Brent crude for July delivery advanced $2.93 to $112.04 bbl. NYMEX June RBOB rallied 11.11 cents to $3.8317 gallon, while front-month ULSD gained more than 12 cents to settle at $3.7920 gallon.

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