Oil Gains With Equities Rebound, Russian Output in Focus

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- With U.S. equities rebounding after a three-session selloff, oil futures traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced in early trade Friday as investors reassess the impact of the disruption to Russian oil production this summer after China reportedly entered discussions to buy additional oil from Russia to replenish its crude oil reserves.

China's oil reserves are estimated to have fallen around 10% so far this spring, with Kpler estimating China's overall crude stockpiles currently stand at 926.1 million barrels (bbl). Storage capacity could be as high as 1 billion bbl, with China secretive regarding its oil infrastructure and inventory levels. China's reserves are said to have reached a record high in September 2020 when Chinese traders went on a buying spree to scoop up discounted oil. For comparison, U.S. Strategic Petroleum Reserve currently holds about 538 million bbl.

China's decision to restock reserves with discounted Russian oil would lend support for the Russian oil industry that has been battered by Western sanctions in the aftermath of its invasion of Ukraine. After falling more than 1 million barrels per day (bpd) in April, Russian oil production recovered somewhere between 200,000 and 300,000 bpd in early May, with the rebound expected to continue in June, according to Russian Prime Minister Alexander Novak. Nonetheless, Russian oil production is still seen falling by as much as 17% in 2022, according to government forecasts, as the country struggles with Western sanctions The scale of the production decline would be the most significant since the 1990s when the oil industry suffered from mismanagement and underinvestment.

In April, Russia's oil production is estimated to have fallen to 9.14 million bpd -- the lowest since Spring 2020.

Disruption of Russian oil production comes at a time when global commodity markets suffer from acute shortages of fuels, especially middle distillates which correlate closely with economic activity. Middle distillates are primarily used in manufacturing, shipping and construction. Domestically, distillate inventories fell to the lowest level since the summer of 2008 that was quickly followed by the onset of the Great Financial Crisis and recession. Similar trends can be observed in Europe where distillate stocks also fell to a 14-year low 378 million bbl in April.

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 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.

Near 7:30 a.m. EDT, West Texas Intermediate June futures gained $0.24 to $112.45 bbl ahead of expiration Friday afternoon, while the July WTI contract narrowed its discount to the expiring contract $2.21 bbl. Brent crude for July delivery advanced $0.53 to $112.57 bbl. NYMEX June RBOB rallied 3.55 cents to $3.8672 gallon, while front-month ULSD traded mostly unchanged near $3.7935 gallon.

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

Liubov Georges