Crude Oil Firms as Tight Supply Worries Outweigh Demand Concerns

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are up nearly 3% for the week with most of the gains attributed to the European Commission’s decision to place an embargo on Russian crude oil. This move is perceived as bullish because it lowers available supply.

Demand is still a concern due to China’s COVID shutdowns, but conditions seem to be holding steady, which brings the country closer to gaining control of the situation and perhaps lifting restrictions sooner than expected. Nonetheless, the lockdowns have taken their toll on the economy, especially the services sector.

At 09:48 GMT, June WTI crude oil is trading $107.91, up $0.10 or +0.09% and July Brent crude oil is at $110.39, up $0.25 or +0.23%. On Wednesday, the United States Oil Fund settled at $80.21, up $3.52 or +4.59%.

This week’s American Petroleum Institute (API) and U.S. Energy Information Administration (EIA) weekly inventories report offered mixed results but they continued to highlight Europe’s strong demand for U.S. refined products especially distillates.

Prices Underpinned by Supply Jitters

Crude oil prices are up this week primarily due to the release of the European Union’s plans for new sanctions against Russia, including an embargo on crude in six months.

The sanctions proposal, which needs unanimous backing by the 27 EU countries, also includes phasing out imports of Russian refined products by the end of 2022, and a ban on all shipping and insurance services for the transportation of Russian oil, according to Reuters.

The French environment and energy minister, Barbara Pompili, is confident European Union member states will reach a consensus on sanctions by the end of this week, according to Reuters.

China’s COVID-19 Lockdowns Weigh on Services Sector

China continues to lockdown parts of its economy as it battles an outbreak of COVID-19. Although there has been evidence of a slowdown in the spread of coronavirus, officials are keeping current restrictions in place.

Over the weekend, China’s manufacturing PMI came in lower than expected. On Wednesday, a report showed China’s services sector activity contracted at the second-steepest rate on record in April. Traders blamed tighter COVID curbs for the weakness in the industry that led to sharper reductions in new business and employment.

The combination of the two weak PMI reports is putting pressure on demand. The problem with this scenario is that no one knows when the lockdowns will end so trader worries are open-ended.

Mixed Energy Information Administration Report Adds to Trader Confusion

Traders looking to get some guidance from the government’s weekly inventories report were probably disappointed when the EIA reported U.S. crude oil stockpiles rose unexpectedly last week, while distillate and gasoline inventories dropped.

U.S. crude supply likely rose because the government continued its release of oil from its Strategic Petroleum Reserve. As a result, crude stocks at the key Cushing, Oklahoma, storage hub rose by 1.4 million barrels in the week, even as production held steady at 11.9 million bpd, the EIA said.

Meanwhile, distillate and gasoline inventories dropped again as refiners continue to boost fuel exports to a world in need of supply. Russia’s invasion of Ukraine, and subsequent moves by the United States and allies to curtail imports of Russian oil, has tightened supply worldwide. That has boosted interest in U.S. refined products exports.

Short-Term Outlook

The price action suggests that the EU moving closer to a ban of Russian oil is offsetting concerns over a loss of demand from China. Traders are expecting the move to tighten supply even further.

“There is one million barrels a day of Russian crude off the system today…We think that will probably double this month, when existing sanctions come into effect,” BP Chief Executive Officer Bernard Looney said earlier in the week.

This increase in the supply loss combined with the expected drop in demand from China is likely to keep prices underpinned over the near-term.