DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange edged higher early Thursday following Wednesday's losses, as data released overnight showed crude throughput at refineries in China jumped 15.4% year-on-year in May, countering other data from Asia showing industrial production and retail sales in the world's second-largest economy underperformed last month.

While the year-on-year comparison is against weak demand amid COVID lockdowns in China that slowed economic growth, the Organization of the Petroleum Exporting Countries expects the country's oil demand to rise through the rest of the year.

"China is also benefitting from pent-up demand in the services sector after around three years of lockdowns," said OPEC earlier this week in its Monthly Oil Market Report.

For the second quarter, OPEC expects oil demand by China to average 15.56 million bpd, 1.11 million bpd or 7.7% above the comparable year-ago period. For all of 2023, OPEC forecasts China's demand for oil at 15.7 million bpd, 850,000 bpd or 5.7% above the 2022 consumption rate.

The bullish data point was countered by weak readings for industrial production and retail sales, with industrial output in China in May up a less-than-expected 3.5%, easing from April's 5.6% annual increase. Retail sales in China last month were 12.7% higher than a year ago but missed expectations for a year-on-year increase of 13.8%, while stepping down from April's 18.4% annual growth rate.

The latest data is more evidence China's economic recovery from years of lockdown is slowing, which prompted the People's Bank of China to cut short-term lending rates this week to boost demand. PBOC also injected 2 billion yuan, about $280 million, into its banking system. Reports indicate lending is down in China, a troubling sign for an economy looking to grow, highlighting the challenges for Beijing.

The lack of borrowing implies uncertainty, while many households already hold high debt. Moreover, China's real estate market remains in disarray after indebted builders failed to complete construction on numerous apartments, undermining consumer confidence. Unemployment among young workers reached a record high in April at 20.4%, according to Reuters, as university graduates shun factory work despite a shortage of labor amid an aging workforce. Marriages and birth rates are down in China, more evidence of economic malaise.

The U.S. dollar index strengthened early Thursday against a basket of foreign currencies from Wednesday's 102.635 four-week low after the Federal Open Market Committee left the federal funds rate unchanged in a 5% by 5.25% target range. However, the Federal Reserve's dot plot showed central bank officials expect the key overnight bank borrowing rate to reach 5.6% by year's end, eyeing further rate increases amid stubborn inflation pressure.

"Looking ahead, nearly all policymakers view some further rate hikes this year will be appropriate," said Federal Reserve Chairman Jerome Powell Wednesday afternoon following the two-day FOMC policy meeting.

This morning, the Governing Council of the European Central Bank is expected to lift the benchmark interest rate for refinancing operations for the Eurozone by 25-basis points to 4% this morning. The Eurozone is also contending with high inflation, worsened by Russia's invasion of Ukraine last year that upended trade flows and spiked energy costs.

In the United States, while the services sector retains strength, the goods sector remains weak, with the Bureau of Labor Statistics on Wednesday reporting the Producer Price Index falling more than expected in May, down 0.3% from the month prior and up 1.1% year-on-year, which is well below April's 2.3% annual increase.

The slowdown in wholesale prices aligns with expectations that industrial production last month slowed to 0.1% from 0.5% in April, and manufacturing output is anticipated to have eased from 1% in April to 0.2% in May when the Federal Reserve releases its monthly data later this morning.

Regionally, the sluggishness in manufacturing activity continued into June, with the Philadelphia Fed manufacturing index expected to move deeper into contraction with a -14.5 reading from -10.4 in May, and the Empire State Manufacturing Index is seen at -15.1 following May's -31.8 reading.

Near 7:30 AM ET, NYMEX July West Texas Intermediate futures were up $0.80 at $69.07 bbl, after having settled Monday's session at a $67.12 three-month low on the continuous chart. ICE August Brent futures gained $0.90 to $74.10 bbl, recovering from Monday's $71.84 settlement, which was the lowest settlement for the international crude benchmark on the continuous chart since December 2021. NYMEX July ULSD futures were $0.0218 higher at $2.3795 gallon, and the July RBOB contract gained $0.0234 to $2.5780 gallon.

Brian Milne can be reached at brian.milne@dtn.com