Crude Jumps on Speculation China Might Soon End Covid Zero Policies

Dec WTI crude oil (CLZ22) this morning is up +1.93 (+2.23%), and Dec RBOB gasoline (RBZ22) is up +6.57 (+2.60%).  Dec Nymex natural gas (NGZ22) is down -0.406 (-6.39%).

Crude oil and gasoline prices this morning are moderately higher on speculation that Chinese policymakers might be preparing to gradually exit the country's Covid Zero policy.  However, crude prices fell back from their best levels today after stocks erased an early rally and turned lower, and after the dollar recovered from early losses and turned higher.  

Dec nat-gas prices today are sharply lower on concern that the Freeport LNG export terminal will remain closed longer than expected as the company has yet to submit a restart plan to federal regulators.  Freeport has previously said it plans to return by early to mid-November.  The current projected opening date is November 21.  A prolonged closure of the export terminal will curb U.S nat-gas exports and put upward pressure on domestic supplies.  The Freeport terminal accounted for about 20% of all U.S. nat-gas exports before the explosion on June 8 knocked it offline.

Crude prices jumped today after unverified social media posts circulated online that a committee was being formed to assess scenarios on how to exit Covid Zero, although China’s Foreign Ministry said it was unaware of such a plan.  

Today's stronger-than-expected U.S. economic news was bullish for energy demand and crude prices.  The Sep JOLTS job openings report unexpectedly rose +437,000 to 10.717 million, showing a stronger labor market than expectations of a decline to 9.750 million.  Also, the Oct ISM manufacturing index fell -0.7 to 50.2, stronger than expectations of 50.0.  In addition, Sep construction spending unexpectedly rose +0.2% m/m, stronger than expectations of a -0.6% m/m decline.

In a bearish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week rose +2.7% w/w to 96.79 million bbls in the week ended October 28.

Crude oil prices are seeing support from reports that U.S. officials are scaling back the plan for capping Russian oil prices and have increased the targeted cap price.  The U.S. is trying to use the plan to starve Russia of the oil revenue it uses to fund its invasion of Ukraine.  The group of countries indicating they would participate in the plan is reportedly limited to the G-7 countries and a few other countries.  China, India, and Turkey have indicated they would not participate, which would put a big hole in the plan.  European sanctions blocking the seaborne import into Europe of Russian crude oil go into effect on December 5.

In a bearish factor, China's Zero Covid policy continues to cause lockdowns and weak energy demand in China.  China reported 2,675 new Covid infections on Sunday, the most in 2-1/2 months.  Nomura reported last week that 1 in 6 Chinese people are currently subject to Covid restrictions of varying force.  Crude oil demand remains weak as China's Aug crude oil processing was down -8% y/y.  Air travel in China during the Golden Week holiday in the first week of October was down -42% from a year earlier, and road trips by Chinese tourists during the week-long holiday were down about -30% from a year ago.  Transportation accounts for about half of oil consumption in China.

OPEC+ on October 5 agreed to cut its collective output by -2.0 million bpd for November and December, a bigger cut than expectations of -1.0 million bpd.  Saudi Arabia's energy minister said the real-world impact of the crude production cuts would likely be around 1 million to 1.1 million bpd from November since some members are already pumping well below their quotas.  

OPEC crude production in September rose +230,000 bpd to a 2-1/2 year high of 29.89 million bpd.  An increase in crude exports from Libya is bearish for oil prices after Libya Sep crude exports jumped +25% m/m to 1.16 million bpd, a 14-month high.

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of October 21 were -1.3% below the seasonal 5-year average, (2) gasoline inventories were -6.7% below the seasonal 5-year average, and (3) distillate inventories were -20.2% below the 5-year seasonal average.  U.S. crude oil production in the week ended October 21 was unchanged at w/w to 12.0 million bpd, which is only -1.1 million bpd (-8.4%) below the Feb-2020 record-high of 13.1 million bpd.

Baker Hughes reported last Friday that active U.S. oil rigs in the week ended October 28 fell by -2 rigs to 610 rigs, falling back from the 2-1/2 year high of 612 rigs posted in the week ended October 21.  U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signaling an increase in U.S. crude oil production capacity.
 

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