DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange dropped more than 1% early Wednesday after the International Energy Agency forecast that the global oil market is likely to remain in surplus for the first half of the year, with oil inventories held in OECD countries climbing to 18-month highs on the back of strong Russian crude oil exports.

In its monthly oil market report released Wednesday morning, the IEA estimated global oil supply leapt 830,000 barrels per day (bpd) in February to 101.5 million bpd, driven by a rebound in the U.S. and Canada after weather-related disruptions along with ample crude exports from Russia that are being rerouted to new destinations in Asia. The agency forecasts output growth in non-OPEC countries will continue to outstrip lackluster demand in the first half of the year, but seasonal trends and China's post-COVID recovery are still set to tip the market balances into deficit in the second half of the year.

Global oil demand is set to accelerate sharply over the course of 2023, rising from a 710,000-bpd year-on-year increase in the first quarter 2023 to 2.6 million bpd in the fourth quarter. Rebounding air traffic and the release of pent-up Chinese demand dominate the recovery.

The most recent data out of China showed the economy picked up some momentum at the start of the year, with retail sales rising 3.5% in January and February compared to year-ago levels and industrial output jumping 2.4% as local governments increased infrastructure spending. However, the unemployment rate, particularly among young people, increased to almost 18%, pointing to protracted weakness in domestic demand.

Despite these uncertainties, the IEA sticks to its bullish call on China, expecting the momentum in Asia's largest economy to drive global demand to a record 102 million bpd.

For Russia, the IEA expects average oil production will stand at 10.4 million bpd this year, 300,000 bpd more than it was forecasting last month, but still 740,000 bpd less than in 2022. Russia has largely managed to maintain its production levels as it has sought out alternative customers, particularly in India and China.

"Willing buyers in Asia, namely India and, to a lesser extent, China, have snapped up discounted crude oil cargoes, but increasing volumes on the water suggest the share of Russian oil in their import mix may be getting too big for comfort. Russia accounted for around 40% and 20% of Indian and Chinese crude imports, respectively, in February. The two countries took in more than 70% of Russia's crude exports last month." the IEA stated in its monthly report.

Stable crude oil exports are seen lifting the Russian economy into positive growth this year, according to economists from the International Monetary Fund. The IMF, known for its gloomy forecasts, upgraded Russian gross domestic product estimates from a 2.3% decline seen at the end of 2022 to a positive 0.3% in February.

"At the current oil price cap level, Russian crude oil export volumes are not expected to be significantly affected, with Russian trade continuing to be redirected from sanctioning to non-sanctioning countries." the IMF said.

Separately, the American Petroleum Institute reported Tuesday U.S. commercial crude oil inventories increased by a larger-than-expected margin during the week ended March 10, while draws in gasoline and distillate fuel stockpiles surpassed expectations.

Details of the report showed an increase of 1.155 million barrels (bbl) in commercial crude oil stocks last week, well above calls for a 100,000-bbl gain. Stocks at the Cushing, Oklahoma, tank farm -- the New York Mercantile Exchange delivery point for West Texas Intermediate futures -- fell 946,000 bbl on the week. Gasoline inventories dropped 4.587 million bbl through March 10, more than three times the estimate for a 1.2-million-bbl draw. API data show middle distillate inventories were drawn down 2.886 million bbl, more than four times the expected 600,000-bbl decline.

Next, traders will await the release of the official inventory report from the U.S Energy Information Administration on tap for 10:30 a.m. EDT release.

Near 7:45 a.m. EDT, West Texas Intermediate contract for April delivery declined $0.98 to $70.34 bbl, and the international crude benchmark Brent contract for May delivery fell to $76.38 bbl, down $1.04. NYMEX RBOB April futures dropped back $0.0261 to $2.5269 gallon, and ULSD April futures retreated $0.0402 to $2.6742 gallon.

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