DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange extended gains into early trade Wednesday, with both crude benchmarks advancing more than 1.5% as market participants turned cautious over OPEC+ nations' ability to raise production more aggressively in coming months to offset losses in Russian oil output at a time when China -- the world's largest crude oil importer -- moves to ease draconian lockdowns.

Shanghai, a city of 25 million people, has finally made the first steps to ease COVID controls that depressed China's economic activity to the lowest levels since the Wuhan outbreak in early 2020. The city resumed taxi service and public transportation while allowing factories in low-risk areas to operate at 90% of capacity. Cases in China's financial hub fell to 67 on Monday from 122 on Saturday, while in Beijing, a city of 21 million, cases dropped to just 12 on Sunday (May 29), said Chinese health authorities. The encouraging data fueled investor hopes that the worst of the outbreak that has pillaged China's largest cities is now over, and the world's second largest economy could start a gradual path towards a sustainable reopening.

Overnight data out of China showed that manufacturing activity contracted at a slower pace in May, rising towards 49.7 from April's more than two-year low 47.4. A reading below 50 indicates a contraction, but the gauge was better than the median estimate of 49 expected by economists. The non-manufacturing gauge, which measures activity in the construction and services sectors, increased to 47.8 from April's 41.9, above consensus of 45.5.

The reopening of China with its ferocious appetite for oil comes at a time when the European Union moved to ban Russian seaborne oil imports in response to Russia's continued aggression against its democratic neighbor Ukraine. The measure will likely affect as much as 2.5 million barrels per day (bpd) in crude and petroleum product imports into the EU.

Redirecting those flows would be a massive undertaking on the part of Moscow, with analysts now calling for a deeper disruption to Russian oil production this year. International Energy Agency previously forecasted Russia's output could drop as much as 3 million bpd in the second half of the year.

Faced with those headwinds, OPEC+ is reportedly considering an exemption for Russia from an oil production agreement that is unwinding steep production cuts made in April 2020 in gradual monthly installments. Russia has missed its production targets for several months now, with the latest data indicating the country's output is close to 9.7 million bpd -- some 1 million bpd below its allotted quota.

"It does not make sense to make them stick to a quota," said one OPEC delegate.

The reports of possible exemption for Russia raised speculation other OPEC+ countries could increase production more aggressively in coming months to offset the loss of Russian barrels on the global market. However, Saudi Arabia, the de facto leader of the cartel, has repeatedly stressed that the group's spare capacity is limited, estimating it at just 2 million bpd. Spare capacity is the amount of untapped production that can be quickly turned on.

"You need a resilient and strong spare capacity to make sure that you can absorb any supply shocks," Nasser said last week.

Russian Foreign Minister Sergey Lavrov is set to meet with Saudi Arabian Crown Prince Mohammed Bin Salman on Wednesday, ahead of Thursday's meeting of OPEC+ ministers.

Against this backdrop, the disruption to Libya's oil pipeline that connects the country's largest oil field of El Sarir to the Hariga Port on the Mediterranean Sea has further stoked concern over looming fuel shortages. The pipeline leak has reportedly affected 220,000 bpd in daily oil production. The fall in crude output comes on top of an already steep production decline since the middle of April caused by protesters blockading the El Sharara and El Feel fields and the Marsa el-Brega and Zueitina export terminals. Libya's oil production has fallen to around 750,000 bpd in May, a fraction of the 1.6 million bpd Libya previously pumped before the NATO-backed 2011 uprising that ended Muammar Gaddafi's one-man rule of the north African nation.

Near 7:30 a.m. EDT, NYMEX West Texas Intermediate for July delivery gained $1.22 to $115.86 barrel (bbl), with the new front-month Brent contract advancing $1.49 to $117.09 bbl. NYMEX RBOB July futures traded near $4.0246 gallon and the July ULSD contact rallied more than 13 cents to $4.0719 gallon.

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