DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange powered higher on Thursday, lifting RBOB futures to a fresh record-high settlement. Futures were spurred by larger-than-expected draws from U.S. oil and petroleum products stocks during the final week of May, while the decision by OPEC+ to increase its production rate by a modest margin this summer failed to relieve concerns over a structural supply shortfall on the global oil market.

OPEC+ oil ministers agreed on Thursday to raise their collective oil production for July and August by 648,000 barrels per day (bpd), 216,000 bpd above monthly targets that were planned for this summer. According to OPEC+ delegates, the production increase was made to cover for demand growth this summer rather than to fill in for the loss of Russian oil output. Even though the output hike is larger-than-expected, there is a healthy degree of skepticism in the market as to whether increasing production is possible, with several OPEC+ countries having consistently missed their output targets in recent months. Saudi Arabia and the United Arab Emirates are believed to be the only two members that have enough spare capacity to boost output.

On one hand, the decision might suggest Saudi Arabia and the UAE have acknowledged calls from Western nations to deliver more barrels to the market. On the other, it does little to heal a long-term supply shortfall exacerbated by Western sanctions on Russia. As much as 3 million barrels in Russia's daily oil exports are currently at stake as European Union tightens the screws on the Russian oil industry in response to Moscow's aggression in Ukraine.

The European Union on Thursday approved a previously announced sixth sanctions package against Russia, including an embargo on all seaborne oil shipments and an immediate ban on new insurance contracts for ships carrying Russian oil. Existing insurance contracts covering ships carrying Russian oil are to be phased out within six months. Without access to Western financial markets, Russia is left with no alternative but to look for smaller and less developed markets to ensure 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.

Further supporting the oil complex, U.S. Energy Information Administration late morning reported domestic commercial crude oil inventories declined by a massive 5.1 million bbl last week, well above calls for a 500,000-bbl draw. Refiners, meanwhile, processed 236,000 bpd less crude compared to the previous week at 16.03 million bpd.

Lower refinery activity came as demand for refined fuels picked up in the final week of May, with gasoline demand in the United States climbing to the second-highest weekly rate this year at 8.977 million bpd. Demand for distillate fuels also edged higher to 3.969 million bpd, up 102,000 bpd. As a result, distillate inventories declined by 529,000 bpd from the previous week to a 17-year low 106.4 million bbl, some 24% below the five-year average. Gasoline inventories also dropped by a larger-than-expected 711,000 bbl to 219 million bbl and are about 9% below the five-year average.

At settlement, NYMEX West Texas Intermediate for July delivery rallied $1.61 to $116.87 per bbl, and ICE August Brent futures advanced $1.32 to $117.81 per bbl. NYMEX RBOB July futures surged 11.93 cents to $4.1909 per gallon, and the July ULSD contract rallied to $4.2084 per gallon.

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

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