DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled the last trading session of February higher. However, all petroleum contracts closed out the month with modest losses, as investors balanced concerns over the health of the U.S. economy and building oil inventories across G7 countries against supply disruptions in Europe and Latin America.

Preliminary data for Western Europe, the United States, Canada, and Japan show crude oil inventories increased 28 million barrels (bbl) in February, led by outsized builds in U.S. crude and gasoline stocks, according to estimates by the International Energy Agency.

Domestic oil stocks rose every week so far in 2023, building by a massive 58.395 million bbl over the past seven weeks. At 489.041 million bbl, U.S. crude inventories currently stand at the highest level since May 2021. Oil traders anticipate commercial oil stockpiles in the U.S. climbed again by 1 million bbl for the week ended Feb. 24.

The American Petroleum Institute survey is released at 4:30 p.m. EST, followed by government data from the U.S. Energy Information Administration Wednesday morning.

The surveys are expected to also show gasoline stockpiles gained 500,000 bbl from the previous week, with stocks of distillate seen declining by 500,000 bbl. Refinery use likely decreased by 0.3% from the previous week to an 85.6% run rate.

Building supplies across G7 countries raised concerns over fuel demand as global central banks hike interest rates into restrictive territory to tame inflation. Overnight data out of the European Union showed inflation pressures accelerated in France and Spain, the bloc's second- and fourth-largest economies.

Investors kicked off this month armed with the narrative of "immaculate disinflation," in which prices fall without excessive job losses or slower growth. That narrative, however, was quickly blown to pieces after consumer prices in all major economies proved not only sticky but moved in the wrong direction altogether. Consider the U.S. Personal Consumption Expenditure Index, the preferred inflation metric of the Federal Reserve, showed consumer spending increased by the most in nearly two years in January after declining steadily since October. Economists believe that the historically low unemployment rate and competition for workers continue to generate wage growth that is simply too high to permit inflation of just 2%.

Today, money markets are fully priced in a "higher-for-longer" scenario where central banks continue to raise interest rates until their economies slow down enough to bring inflation toward its target. The key concern is that no one really knows what that terminal rate should be given all the pandemic-related disruptions to the labor market and broader economy.

Also, this week traders are monitoring a number of supply disruptions in Europe and Latin America. In Ecuador, rupture of the key SOTE pipeline sliced the country's oil production in half, triggering a declaration of force majeure on crude deliveries. Ecuador crude production averaged 485,000 barrels per day (bpd) before the force majeure. By Tuesday, it had fallen to close to 220,000 bpd, according to government data. Ecuador's President Guillermo Lasso said that operations would begin to normalize in the next 17 days, weather permitting, thanks in part to a new detour being constructed for the SOTE.

In Europe, Russia cut oil supplies via the Druzhba pipeline to Poland a day after Warsaw approved Leopard tanks to Ukraine. The Druzhba pipeline supplies oil to Poland and Germany, as well as to Hungary, Czech Republic, and Slovakia, which were provided an exemption from EU sanctions to help the landlocked countries of Eastern and Central Europe secure oil supplies. It doesn't appear that disruption in Poland affected deliveries to these countries or fundamentally changed the supply and demand balances for the continent. However, in the short term, the cutoff oil flow might deliver an upside lift to oil prices as investors navigate a myriad of risks.

Internationally, the global crude benchmark Brent contract for April delivery expired $1.44 higher at $83.89 per bbl, with the May contract settling at $83.45 per bbl. The NYMEX West Texas Intermediate April contract added $1.37 to $77.05 per bbl. The NYMEX RBOB March expired $0.0660 higher at $2.4343 per gallon, with the April contract modestly narrowing its premium to the expiring contract to $0.2077. NYMEX ULSD March futures expired fractionally higher at $2.8209 per gallon, and ULSD April futures finished the session at $2.8056 per gallon.

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