Crude oil futures extend gains as concerns linger over EU ban on Russian oil

Crude oil futures climbed for the third straight session during mid-morning Asian trade May 6, erasing earlier losses, as concerns lingered over the prospect of tighter supply after the European Union's embargo on Russian oil, while OPEC+ went ahead with its planned supply increase at its latest meeting.

At 10:26 am Singapore time (0226 GMT), the ICE July Brent futures contract was up 42 cents/b (0.38%) from the previous close at $111.32/b, while the NYMEX June light sweet crude contract rose 42 cents/b (0.39%) at $108.68/b.

OPEC and its Russia-led partners on May 5 approved another modest 432,000 b/d increase in production quotas for June, continuing to look past the impact that the war in Ukraine has had on the market as they benefitted from a windfall in oil revenues, analysts said.

Even with an expected European ban on Russian oil supplies set to squeeze global supplies further, the 23-country OPEC+ alliance insisted that current supply-demand indicators "pointed to a balanced market," according to a statement after the group met for just 13 minutes to reaffirm its plan for monthly measured quota hikes.

As has been the case for past months, however, the pledged supply increases from the producer group will likely fall short, with most members of the alliance already unable to raise output because of a lack of investment or internal disruptions.

"The group is struggling to hit output quotas due to disruptions and a lack of investment in fields," said ING analysts Warren Patterson and Wenyu Yao in a May 6 note. "Lagging production is unlikely to change anytime soon, particularly given the weaker demand for Russian oil, which will eventually lead to output decreasing."

The prospect of tighter supply, as the EU moves ahead with an embargo on Russian oil to be fully phased in by year-end, saw both front month ICE Brent and NYMEX crude contracts gradually reversing losses of more than $1/b in early morning trade.

Investors were also mulling the US Department of Energy's plans to buy back 60 million barrels of crude for the Strategic Petroleum Reserve, or one-third of the massive drawdown that just started flowing, at lower prices; likely in the second half of 2023.

In outlining the plan announced May 5 to refill the emergency oil stockpile based on a future delivery window, the DOE said it was aiming to encourage US drillers to boost activity and "lower prices this year by guaranteeing this demand in the future at a time when market participants anticipate crude oil prices to be significantly lower than they are today."

"The market was surprised by the announcement that the US Energy Department would start purchasing oil to refill the nation's strategic reserve. This is likely to exacerbate the tightness in the oil market," ANZ Research analysts Brian Martin and Daniel Hynes said.

Dubai crude swaps and intermonth spreads were higher in mid-morning trade in Asia May 6 from the previous close.

The July Dubai swap was pegged at $102.60/b at 10 am Singapore time (0200 GMT), up 56 cents/b (0.55%) from the May 5 Asian market close.

The June-July Dubai swap intermonth spread was pegged at $2.37/b at 10 am, up 7 cents/b over the same period, and the July-August intermonth spread was pegged at $1.89/b, up 6 cents/b.

The July Brent-Dubai exchange of futures for swaps was pegged at $8.65/b, up 28 cents/b.