DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the first trading session of June higher, underpinned by an announcement from the European Union to embargo Russian seaborne oil imports joined by a U.K. ban on providing insurance for waterborne Russian oil cargoes in a move that further limits Moscow's ability to circumvent Western sanctions despite an increasingly tightening global oil market.

The United Kingdom and EU have agreed on a coordinated ban to ensure ships carrying Russian oil would be denied insurance coverage from London-based Lloyds, exposing shippers to major losses should they continue to carry Russian oil. The London based insurance giant represents roughly 90% of the global insurance market for shippers, leaving Moscow no alternative but to look for smaller and less developed markets to insure Russian oil cargoes.

Russia is the world's largest exporter of petroleum products and the second largest crude oil exporter behind only Saudi Arabia. According to International Energy Agency, Russia exported 7.8 million barrels per day (bpd) of oil and refined products in December 2021, of which crude and condensate accounted for 5 million bpd and oil products accounted for about 2.85 million bpd.

The insurance ban would surely have a crippling effect on Russia's oil industry, with analysts estimating the country's oil production already plunged below 10 million bpd in early May from 11.3 million bpd in January.

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.

Reports of a 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.

Separately, oil traders also awaited the release of weekly inventory data in the United States, with the American Petroleum Institute publishing its survey 4:30 PM ET, followed by an official report from the U.S. Energy Information Administration Thursday morning, a day later than normal due to Monday's Memorial Day holiday. Analysts estimate U.S. commercial oil inventories likely declined by 500,000 barrels (bbl) for the week ended May 27. Gasoline stockpiles are expected to have decreased by 100,000 bbl from the previous week, while stocks of distillates are expected to have risen by 800,000 bbl. Refinery use likely rose by 0.4% from the previous week to 93.6% of capacity.

In China, officials have finally moved to ease draconian lockdowns across major cities, boosting optimism for faster demand growth in the world's second largest economy this summer. Shanghai, a city of 25 million people, resumed taxi service and public transportation on Wednesday 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.

At settlement, NYMEX West Texas Intermediate for July delivery gained $0.59 to $115.26 bbl, with the new front-month Brent contract advancing $0.69 to $116.29 bbl. NYMEX RBOB July futures rallied 15.54 cents to $4.0716 gallon and the July ULSD contract surged more than 20 cents to $4.1433 gallon.

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