DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange turned lower in afternoon trade Wednesday, sending gasoline and distillate contracts down 3% or more. The losses came after weekly inventory data from the U.S. Energy Information Administration showed a bearish 5.2 million-barrel (bbl) build in domestic fuel inventories amid flashing signs of demand destruction.

Wednesday's inventory report, the first in two weeks following a server failure experienced by the government entity, was overall bearish, showing weak product deliveries that pushed supply into inventory, and recovering crude oil production that climbed to the highest output rate since the beginning of the pandemic in 2020. Domestic producers pumped 12.1 million barrels per day (bpd) of crude during the week ended June 24, up 100,000 bpd from the previous week. U.S. output remains about 1 million bpd below the pre-pandemic high.

Gasoline stockpiles rose 2.6 million bbl from the previous week to 221.6 million bbl compared with analyst expectations for inventories to have decreased by 800,000 bbl. Meanwhile, implied demand for gasoline recovered last week, up 417,000 bpd from a 12-week low 8.505 million bpd during the week ended June 17, EIA data show.

Distillate fuels supplied to the U.S. market fell 294,000 bpd to a 3.568 million-bpd 11-week low last week, with lower diesel demand aligning with a slowing U.S. economy. Distillate stocks rose 2.6 million bbl to 112.4 million bbl and are now about 20% below the five-year average.

Bullish elements in the report could be found in crude stocks that fell by a larger-than-expected 2.8 million bbl from the previous week to 415.6 million bbl last week and are now about 13% below the five-year average. The hefty draw occurred as refiners jacked the national run rate up 1% to 95% of capacity last week, processing 16.7 million bpd of crude oil, up 403,000 bpd from the previous week to the highest input rate since before the pandemic in January 2020.

A 700,000-bbl draw from crude oil stored at Cushing tanks in Oklahoma, the delivery point for the NYMEX West Texas Intermediate futures, pressed inventory there to a 21.3 million bbl 7-1/2-year low. Inventory at Cushing is near the minimum operating level that's estimated between 16 million and 22 million bbl.

WTI and Brent futures traded 2.5% higher earlier in the session after reports emerged suggesting Saudi Arabia, OPEC's largest producer, might have less spare capacity than previously believed. Comments from French President Emanual Macron on the sidelines of the Group of Seven summit in Germany earlier this week suggested the Saudis, along with United Arab Emirates, at best might be able to increase production by 150,000 bpd over the next six months.

During an OPEC+ meeting Thursday, oil representatives are expected to agree on hiking output for August that, on paper, would fully unwind production cuts made in the second quarter 2020 in the face of lost demand amid pandemic lockdowns. The quota for the Saudis would likely be near the 11.1 million bpd, with the quota for the kingdom in July at 10.833 million bpd. Earlier this month, OPEC, citing secondary sources, said Saudi production averaged 10.424 million bpd in May, while the Saudis self-reported output of 10.538 million bpd.

The reality is Saudi Arabia has never produced above 11 million bpd for a prolonged period, with the maximum output of 11.5 million bpd reached in April 2020 at the height of Saudi market share war with Russia. Aramco, Saudi Arabia's state-owned oil giant, previously said it can sustainably produce 12 million bpd and increase it to a maximum of 13 million bpd over the course of next few years, which compares with production of 10.424 million bpd in May. The bulk of that expansion is expected to come from three key oilfields known as Zuluf, Marjan and Berri, slated to come into service in 2025 and 2026.

After concluding a two-day meeting Wednesday, the OPEC+ Joint Technical Committee released a document that said the global oil market surplus is likely to narrow to 1 million bpd by the end of the year from their previous estimate of 1.4 million bpd. Interestingly, the lowering of crude oil surplus projections comes as the OPEC+ group continues to produce under quota. In May, the shortfall is estimated at 2.7 million bpd.

OPEC+ agreed to increase July production by 648,000 bpd and is expected to repeat approval for another 648,000 bpd for August.

At settlement, NYMEX August WTI futures fell $1.98 to $109.78 per bbl on the session, and down from an intrasession high of $114.05 per bbl. ICE Brent crude for August delivery declined $1.72 to $116.26 per bbl after breaching $120 with a $120.41 intrasession high ahead of expiration Thursday afternoon, with the September contract settling at a $3.81 discount. NYMEX July RBOB dropped 10.81 cents to $3.8270 per gallon, with the next-month contract expanding its discount to the expiring contract to 10.37 cents. NYMEX July ULSD futures, which also expire Thursday afternoon, fell 16.27 cents to $4.0367 per gallon and August ULSD futures settled at $3.9563 per gallon.

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

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