DTN Oil

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced in afternoon trade Friday, with the U.S. crude benchmark for June delivery expiring at a two-month high $113.23 amid tightening crude inventories in the United States as demand for gasoline powered higher into the start of the summer driving season, while easing COVID-19 controls across China's largest cities spurred optimism for more robust demand growth globally.

Rebound in China's mobility will likely remain the focus of next week's trading after Shanghai authorities said they would start relaxing draconian lockdowns in the city of 25 million people. Shanghai's COVID cases have been trending lower in recent weeks, raising hope the city could roar back to life once restrictions are lifted. By comparison, Beijing, a city of 21 million, has seen new cases climb this week even as authorities claim they would do everything to avoid the Shanghai-style lockdown.

The contrasting dynamics in China's two largest cities makes a complicated case for forecasting demand growth in the world's top oil importer. Wire services reported this week China is seeking more oil from Russia to restock its strategic reserves that have recently fallen after reaching a record high in September 2020 when Chinese traders went on a buying spree to scoop up discounted oil. Russian flagship Urals is currently trading at a steep $34 per barrel (bbl) discount against the international crude benchmark Brent contract amid reluctance of Western traders to deal with Russian oil shipments.

China's move to restock reserves with cheap Russian oil could potentially lend support for the Russian oil industry that has been hit by Western sanctions in the aftermath of its invasion of Ukraine. After falling more than 1 million bpd in April, Russian oil production recovered somewhere between 200,000 and 300,000 barrels per day (bpd) in early May, according to Russian Prime Minister Alexander Novak. Nonetheless, Russian oil production is still seen falling by as much as 17% in 2022, with analysts pointing to ongoing 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.

Limiting upside for WTI futures, Baker Hughes reported Friday afternoon the number of active oil rigs in the United States jumped 13 this week through today to a new two-year high 576, with the weekly increase the largest in 12 months. This might suggest that domestic producers are set to ramp put output in coming weeks. If realized, U.S. oil production of around 11.9 million bpd, which is still about 1 million bpd below pre-pandemic levels, may start to rise more quickly in the second half of the year.

Also lending price support, Wednesday's weekly report from the Energy Information Administration 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 of crude last week, which helped ease concern over a crunch in gasoline and diesel supplies. U.S. 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.

At expiration, WTI June futures gained $1.02 to $113.23 bbl, while the July WTI contract expanded its discount to the now expired contract to $2.95 bbl with settlement at $110.28 bbl. Brent crude for July delivery advanced $0.51 to a $112.55 bbl settlement. NYMEX June RBOB gained 0.53 cents to $3.8370 gallon, while front-month ULSD declined 5.29 cents to $3.7391 gallon.

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