DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied more than 2% on Friday, with all petroleum contracts posting a seventh consecutive week of steep gains. The gains were spearheaded by China's reopening from draconian lockdowns that strangled its economy for three months and a European Union embargo on Russian oil imports joined with a sweeping ban on insurance coverage for waterborne Russian oil and petroleum products globally.

Even news OPEC+ agreed to raise oil production by a larger-than-expected 648,000 barrels per day (bpd) in July and August had a short-lived impact on prices, with both crude benchmarks finishing a volatile week as much as 3% higher.

NYMEX West Texas Intermediate for July delivery settled Friday's session at $118.87 per bbl, up $2, with the international crude benchmark Brent contract rallying $2.11 to $119.72 per bbl, with gains accelerating post-settlement. The advance by refined products futures once again outpaced those for the crude complex, with nearby-delivery month RBOB settling the session 6.13 cents higher at a fresh record-high $4.2522 per gallon, and ULSD July futures rallied 7.19 cents or 3.16% to $4.2803 per gallon.

Lending upside price pressure for oil products, U.S. Energy Information Administration in its weekly inventory report released Thursday showed a larger-than-expected draw from gasoline and distillate stocks as demand for motor gasoline roared higher. U.S. distillate inventories now stand at their lowest level in 17 years at 106.4 million barrels (bbl), and some 24% below the five-year average. Gasoline inventories also dropped to 219 million bbl and are about 9% below the five-year average.

Crude futures also found buying support after EIA reported U.S. commercial crude oil inventories plunged by a massive 5.1 million bbl from the previous week to 15% below the five-year average at 414.7 million bbl compared with expectations for stockpiles to have shed just 500,000 bbl, with the large draw exacerbating concerns over a broadening supply shortfall heading into the summer.

Underlining gains in the oil complex this week are two bullish developments that, combined, will likely send prices even higher in the summer months.

First, while the agreed-to phased-in EU embargo on Russian oil and products, which joins sanctions by the United States, Canada and United Kingdom, restricts where Moscow can sell its oil, the insurance ban by EU and UK is likely to bite harder. Lloyd's of London covers as much as 90% of waterborne oil deliveries, greatly limiting where Russia and shippers willing to ship Russian oil can turn to for essential liability coverage. As much as 3 million bpd of Russian oil exports could be lost to the global oil market.

In Asia, China finally took the initial steps to ease its three-month lockdown in Shanghai, a city of 25 million people, and removed some COVID controls in its capital Beijing. Both megacities allowed for free movement of people and public transport, while also authorizing factories in low-risk areas to operate at 90% of capacity. The encouraging developments fueled investor hopes that the worst of the COVID restrictions that ravaged the regional economies is now over and would lead to a gradual path toward a sustainable reopening.

Oil briefly paused its rally this week after news broke that OPEC+ nations agreed to raise collective production by a larger-than-expected margin of 648,000 bpd in July and August, pulling forward September's planned output hike. However, many of the group's members have limited spare capacity and often aren't able to reach their targets now. A Reuters survey found output undershot the pledged hikes in every month between October 2021 and April except for February. Furthermore, the production increase would do little to cover for structural supply shortfall on the global market amid steep loses of Russian output and supply disruptions in several OPEC producer nations, including Libya, Nigeria and Angola.

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

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