DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange plummeted in afternoon trade Friday, with all petroleum contracts posting their first weekly loss since late April amid signs of a tentative rebound in Russian oil production supported by strong demand from Asian and European buyers, while ongoing concerns over demand destruction in the United States linked to surging energy prices and aggressive monetary tightening from the Federal Open Market Committee this week further weighted on the oil complex.

Investors navigated a host of downside risks to the oil market this week, including a historic rate hike from the U.S. Federal Reserve that sharply raised risk of a recession, signs of slowing demand across Organization for Economic Cooperation and Development countries in Europe, and a surprise recovery in Russian oil production that is reportedly climbing to its pre-invasion level despite Western sanctions.

Russia's crude production rose 600,000 barrels per day (bpd) so far this month, according to the country's Deputy Prime Minister Alexander Novak, which lifted daily output close to 11 million bpd. "There are reasons to believe that we will continue raising production in July," added Novak.

One reason behind the resiliency is increased crude exports to Asian buyers, including India and China that now take more than half of all Russian oil exports, with a steady stream of tankers heading around Europe and through the Suez Canal from the Baltic and Arctic seas, according to Bloomberg estimates. India has moved from being an insignificant buyer of Russian crude to the second-biggest destination for its shipments, behind only China. Almost 860,000 bpd of crude were loaded onto tankers at Russia's western export terminals in the week to June 10 before heading to destinations in Asia. And the figure will almost certainly be revised higher once destinations become apparent for almost 210,000 bpd that are on vessels yet to show a final discharge point.

Nonetheless, Russian oil output is set to decline by 18% -- from 11.3 million bpd in the first quarter to 9.3 million bpd in the final quarter of 2023 as a result of an EU embargo on both crude oil and refined product imports, the U.S. Energy Information Administration said last week. The European Union has agreed to ban Russian seaborne oil imports, but this won't take full effect until December. In the meantime, European refiners, shippers, and traders continue dealing with Russian oil, limiting the impact on the overall level of shipments.

In financial markets, FOMC stepped up its fight against inflation this week by announcing a rare 75-basis point rate hike -- the biggest single increase since 1994. Fed officials also markedly cut their outlook for 2022 economic growth, now anticipating a 1.7% expansion in U.S. gross domestic product compared with its 2.8% growth outlook in March. That outlook might be too rosy, with Atlanta's Federal Reserve Bank's GDPNow tracker now showing expectations for no growth in the second quarter, down from 0.9% expected growth on June 8, while following a 1.5% contraction for the first quarter.

But even with Fed escalating its fight against soaring prices, inflation is projected to stay above 5% this year before moderating to 2.6% in 2023 and 2.2% the following year, according to the central bank's economic projections. At a news conference Wednesday afternoon following the decision's announcement, Fed Chairman Jerome Powell said while the move was "an unusually large one," added that either a 50-basis point or 75-basis point increase would be appropriate at the Fed's July 27th meeting.

"Recent events raised the degree of difficulty to get a 'softish landing.' We just don't know if we can achieve it," said Powell.

U.S. retail data for May showed consumer spending is already softening, declining for the first time in five months as purchases for autos and electronics plunged, suggesting aggregate demand is finally moderating. As price pressures become more entrenched in the economy, spending will likely ebb as they outpace earnings, with higher prices compounded by climbing interest rates.

At settlement, NYMEX July West Texas Intermediate futures declined $8.03 to $109.56 per barrel (bbl), and ICE August Brent crude fell $6.69 to $113.12 bbl. NYMEX July RBOB futures fell 16.28 cents to $3.7930 gallon, and July ULSD futures erased 23.15 cents in value with a $4.3398 gallon settlement.

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