DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell more than 1.5% early Thursday in reaction to reports suggesting the Organization of the Petroleum Exporting Countries stands ready to compensate for the loss of Russian production, signaling a major policy shift for the alliance that has been unwinding production cuts in incremental monthly installments that previously included Russia.

OPEC+ is likely to agree on an output hike in the range of 600,000 barrels per day (bpd) for the month of July and August, according to sources familiar with ongoing discussions in Vienna, where OPEC+ ministers are set to decide Thursday on the next step in their production policy. That's more than an expected 432,000 bpd in new output for July by OPEC+. Moreover, the reports come atop of chatter the alliance is considering suspending Russia from the production agreement, which has unproduced its monthly quota for several months, so the higher production target being discussed is well above expectations.

Suspending Russia's role in the group could allow other members to increase oil production at a quicker pace, although there are only a few OPEC members believed to have the capacity to ramp up production as quickly as the current deal allows. Following the reports, international crude benchmark erased some gains from earlier this week as market participants reacted to the possibility that members with spare capacity could tap into that capacity and boost production.

Russia, for its part, could see a loss of about 2 million to 3 million bpd of its oil exports, about a quarter of the country's oil production, which would disappear from the global market by the year end.

The United Kingdom and European Union this week agreed upon 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 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.

Also on Thursday, traders await the release of weekly oil inventory data for the United States, delayed a day due to Monday's Memorial Day holiday.

The American Petroleum Institute late Wednesday reported U.S. commercial crude oil inventories declined by a larger-than-expected 1.181 million barrels (bbl) last week, well above calls for a 500,000-bbl draw. Stocks at the Cushing, Oklahoma, hub, the delivery point for the New York Mercantile Exchange West Texas Intermediate contract, added 177,000 bbl during the week profiled.

Gasoline stockpiles declined 256,000 bbl in the week ended May 27 versus estimates for a 100,000-bbl decrease. API data show distillate inventories increased 858,000 bbl, slightly above calls for an 800,000-bbl build.

Near 8:45 a.m. EDT, NYMEX WTI for July delivery dropped $0.59 to $114.76 bbl, and ICE August Brent futures fell $0.41 to $115.89 bbl. NYMEX RBOB July futures declined 1.97 cents to $4.0533 gallon and the July ULSD contract traded slightly lower near $4.1350 gallon.

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