DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled the last trading session of May with sharp losses, sending international crude benchmark to the lowest level in three months pressured by concerns over missing demand growth in China joined with signs of a growing schism between Russia and Saudi Arabia on the potential for new production cuts in the second half of 2023.

Less than 48 hours since Saudi Oil Minister Prince Abdulaziz bin Salman suggested OPEC+ might go for another production cut at the group's next meeting on June 4, his Russian counterpart, Alexander Novak, dismissed the idea, saying the oil market is quite balanced and doesn't require additional production cuts. Adding to the confusion, Russian President Vladimir Putin, speaking at a conference in Moscow on May 24, said oil prices were approaching "economically justified" levels and that Russia was continuing to meet its commitments on energy supplies. These diametrically opposed positions between two of the world's largest oil producers stoked fears of another breakdown between Moscow and Saudi Arabia that led to a painful price war in April 2020.

Arguably, Moscow has made little progress on pledged production cuts and has very little appetite to go for additional commitments after it captured considerable market share from Saudi Arabia by selling cheap oil to Asian consumers. Saudi Arbia, meanwhile, signaled on multiple occasions that it prefers a higher price instead of greater volume to finance "Vision 2030" -- an ambitious reform project previously unveiled by Crown Prince Mohammad Bin Salman.

Since October 2022, OPEC+ has reduced production by 3.5 million barrels per day, a sizable chunk of its collective oil output. Nonetheless, Brent oil prices have fallen from $83 before the October cut to their current level of $72.66 per barrel (bbl).

Underlying losses for the oil complex on Tuesday, China's macroeconomic data continues to disappoint amid la ack of domestic and international demand for its manufactured goods along with high unemployment. China's official manufacturing purchasing managers index fell to the lowest level since December 2022, heightening concerns over an outright recession in the nation's manufacturing economy. China's manufacturing PMIs remained below 50-mark, separating expansion from the contraction, for the second straight month compared to expectations for a solid post-COVID rebound.

Calls are getting louder for China's central bank to take action to spur the domestic economy, including cutting interest rates and boosting stimulus for manufacturers and consumers. While that may give financial markets a lift, it is unlikely to provide a meaningful boost to business confidence that relies heavily on external demand for its manufactured goods. Moreover, China is an export-driven, manufacturing-based economy that requires strong demand pull from consumption-led economies like the United States and European Union. Demand rotation from manufactured goods into services that took place across Western economies over the past two years is unlikely to reverse anytime soon.

Also on Wednesday, oil traders positioned ahead of U.S. weekly inventory reports delayed a day due to observance of Memorial Day holiday on Monday (May 29).

Analysts anticipate U.S. crude-oil stockpiles declined by 1.4 million bbl for the week ended May 26, with a wide range of estimates from a decrease of 5.1 million bbl to an increase of 2 million bbl. Gasoline inventories are expected to have declined by 900,000 bbl from the previous week and stocks of distillates, which is mostly diesel fuel, are seen to have risen by 500,000 bbl. Refinery use likely increased by 0.6% from the previous week to 92.3%, which would be the highest level this year.

Further pressuring the front-month West Texas Intermediate contract, U.S. dollar index strengthened 0.16% against a basket of foreign currencies to finish the session at a 2-1/2 month high 104.245. WTI June futures, meanwhile, plunged $1.37 bbl to $68.09 bbl.

Brent for July delivery expired at $72.66 bbl, shedding $0.88 bbl on the session, and next-month August delivery declined a steeper $1.11 to $72.60 bbl. NYMEX RBOB June futures declined $0.036 gallon to expire at $2.5599, with the next-month delivery contract expanding its discount against the expired contract to a $0.1161 gallon. NYMEX ULSD June contract declined $0.0212 to expire at $2.2596 gallon and next-month delivery July futures settled the session at $2.2509 gallon.

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