DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Thursday's session mixed, with RBOB and ULSD futures advancing more than 1.5% supported by low inventory levels in the United States and globally as summer travel demand is seen recovering to pre-pandemic highs despite surging inflation and cost-of-living in many industrialized economies.

U.S. distillate inventories have started to climb seasonally, rising 2 million barrels (bbl) last week to 109 million bbl, which should ease some concerns about low inventory levels. But even with the recent increase, stocks are still at the lowest level since 2005, and they are not rising especially rapidly, which is likely to keep prices on an upward trend.

Stocks usually increase at this time of year as refineries ramp up their crude processing to produce gasoline for the summer driving season. There are also signs the business cycle in the United States has started to slow, weighing on demand for middle distillates that are typically used in construction, manufacturing, and freight shipments. The U.S. Energy Information Administration reported Wednesday demand for middle distillates fell to the second lowest weekly rate this year at 3.65 million barrels per day (bpd) after remaining below 4 million bpd since late March.

Meanwhile, U.S. gasoline inventories fell to the lowest seasonal level in eight years last week according to EIA, as demand for gasoline spiked above 9.1 million bpd. Despite sky-high prices at the pump, there are no signs of visible change in U.S. driving behaviors, with the seasonal uptick in summer fuel demand seen on track with previous years. Goldman Sachs economists forecast gasoline prices will need to go much higher from where they are now to have a meaningful impact on demand. The bank warned of likely price spikes and fuel shortages this summer as China hums towards reopening its economy and the European Union turns down imports of Russian oil and refined fuels.

Despite headwinds for the eurozone economy, the tourism sector continues to shine bright which should lend a boost to jet fuel consumption. Oxford Economics, using a high-frequency tourism tracker, suggests EU overnight stays in May have recovered to pre-pandemic levels, pointing to a strong holiday season despite a growing cost-of-living crisis. This brings some upside to otherwise negatively skewed risk in the Eurozone. Pent-up demand for travel among households after two years of pandemic seems to be trumping concerns over inflation, joining with expectations of a rotation in spending away from goods to services in 2022.

Potentially weighing on the crude complex Thursday afternoon are fresh COVID-19 curbs in Shanghai, where a reopening from a three-month lockdown had only recently occurred. Shanghai will lockdown seven districts this weekend, restricting movement for millions of people to conduct mass COVID-19 testing after discovering nine cases. The moves are raising concern that the city's reopening is backsliding as officials fear a resurgence of infection after social and economic activity resumed. Residents face the risk of being confined to their homes for another two weeks if any infections are discovered during mass testing, in line with China's COVID zero policy. In the capital Beijing, which has been struggling with long but low-level COVID flareups, authorities ordered a tightening of rules again after a bar cluster ended a five-day streak of zero community spread.

Analysts predict China will be stuck in a slowly evolving loop as it sticks to its zero-COVID policy, making a strong rebound in its economy virtually impossible. Overnight trade data out of China showed crude oil imports fell 1.7% from a year ago over the January to May period, highlighting a drop in oil demand as Beijing restricts mobility for its people.

At settlement, NYMEX West Texas Intermediate for July delivery fell $0.60 to $121.51 bbl, while international crude benchmark Brent contract for August declined to $123.07 bbl. NYMEX RBOB July contract gained 5.43 cents to $4.2762 gallon and ULSD July futures increased 8.94 cents to $4.4037 gallon.

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