DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Wednesday's session with gains between 1.5% and 2% following the weekly inventory report from the U.S. Energy Information Administration showing a 12.5 million bbl drop in commercial crude oil inventories during the third week of May as demand for gasoline jumped to the second highest weekly rate so far this year ahead of the upcoming three-day holiday weekend that unofficially kicks off the summer travel season.

Midmorning inventory data proved bullish for the oil complex, confirming an outsized draw in commercial crude oil inventories last week despite another transfer of crude from the Strategic Petroleum Reserve to the commercial side and a rise in domestic oil production. At 455.2 million bbl, U.S. commercial oil inventories now stand 3% below the five-year average. The draw came even as domestic refiners scaled back the run rate to 91.7% of capacity, processing 16.1 million bpd, roughly the same volume compared to last week.

In the gasoline complex, demand for the transportation fuel jumped 529,000 bpd from the previous week to 9.437 million bpd -- the second-highest weekly rate so far this year, according to EIA.

Gains for gasoline demand come ahead of the Memorial Day weekend that typically marks the beginning of the busy summer travel season. The American Automobile Association projects 42.3 million Americans will take to the road this Memorial Day weekend, a 2.7 million or 7% increase from a year earlier. If realized, it would be the third busiest travel for the holiday, with AAA beginning its holiday travel outlook in 2000.

"More Americans are planning trips and booking them earlier, despite inflation. This summer travel season could be one for the record books, especially at airports," said Paula Twidale, senior vice president of AAA Travel.

Commercial gasoline inventories declined by 2.1 million bbl in the reviewed week and are about 8% below the five-year average. Earlier in the week, analysts estimated gasoline stocks would decline by 1.3 million bbl.

For diesel, stockpiles fell by 561,000 bbl to 105.7 million bbl, and are now about 18% below the five-year average, EIA said. Analysts estimated distillates inventories would rise by 300,000 bbl last week.

Further spurring gains in the oil complex, Saudi oil minister Prince Abdulaziz bin Salman suggested OPEC+ could consider cutting oil production further at their early June meeting to squeeze out short sellers.

"I keep advising them that they will be ouching -- they did ouch in April," Prince Abdulaziz bin Salman said at the Qatar Economic Forum in Doha on Tuesday, according to Reuters. "I don't have to show my cards, I am not a poker player…but I would just tell them: Watch out!"

On April 2, OPEC announced a surprise production cut of 1.157 million bpd effective May 1 until the end of the year, with Saudi Arabia and other Gulf producers shouldering the lion's share of that output curb. The reduction comes on top of the 2 million bpd cut announced in October 2022 that has so far been the largest cut to OPEC+ output since the start of the pandemic. Arguably, Saudi oil strategy is to defend prices by any means necessary as the kingdom seeks to transition from oil in the coming decades and needs higher prices now to finance this project.

In initial reaction to OPEC+ cutbacks, short sellers fled the market but not for long as concerns over China's post-COVID rebound and potential for U.S. recession stoked bearish bets. The latest market data showed speculators and money managers reducing long positions in West Texas Intermediate futures.

OPEC+ will meet next on June 3-4 in Vienna to review production policy for the second half of the year and analysts say another surprise cut should not be ruled out.

At settlement, WTI futures for July delivery rallied $1.43 to 74.34 bbl, and ICE July Brent, the international crude benchmark, advanced to $78.36 bbl, up $1.52. NYMEX June RBOB futures settled $0.0590 higher at $2.7212 gallon, while June ULSD futures added $0.0520 to $2.4137 gallon.