Crude Rallies on Chinese Energy Demand Optimism and a Fall in EIA Inventories

Dec WTI crude oil (CLZ22) this morning is up +1.66 (+1.88%), and Dec RBOB gasoline (RBZ22) is up +8.41 (+3.24%).  Dec Nymex natural gas (NGZ22) is up +0.438 (+7.67%).

Crude oil and gasoline prices this morning are sharply higher, with crude climbing to a 3-week high, on speculation that Chinese policymakers might be preparing to gradually exit the country's Covid Zero policy.  Crude prices extended their gains today after weekly EIA crude inventories fell more than expected.

Dec nat-gas this morning is sharply higher on forecasts for colder U.S. weather, which would boost heating demand for nat-gas.  The Commodity Weather Group today said that below-normal temperatures are expected in the West from November 7-11, with the cold temperatures moving eastward into the Midwest by November 12-16.

Crude prices are supported by speculation China may ease its Covid Zero policy.  A second day of unverified social media posts said the Chinese government is considering changes to its Covid Zero policy, including a shorter quarantine period for inbound travelers.  

Today's global economic news was mixed for energy demand and crude prices.  On the positive side, U.S. Oct ADP employment rose by +239,000, stronger than expectations of +185,000.  Conversely, the Eurozone Oct S&P Global manufacturing PMI was revised downward by -0.2 to a 2-1/2 year low of 46.4 from the previously reported 46.6.

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 October rose +30,000 bpd to a 2-1/2 year high of 29.98 million bpd.  

Today's weekly EIA report was mixed for crude prices.  On the positive side, EIA crude inventories fell -3.12 million bbl, a bigger draw than expectations of -200,000 bbl.  Also, EIA gasoline stockpiles fell -1.26 million bbl to an 8-year low, a bigger draw than expectations of -1.0 million bbl.  On the bearish side, EIA distillate supplies unexpectedly rose +427,000 versus expectations of a -500,000 bbl decline.  Also, crude stockpiles at Cushing, the delivery point of WTI futures, rose +1.27 million bbl to a 5-1/2 month high.

Today's EIA report showed that (1) U.S. crude oil inventories as of October 28 were -2.6% below the seasonal 5-year average, (2) gasoline inventories were -6.2% below the seasonal 5-year average, and (3) distillate inventories were -18.6% below the 5-year seasonal average.  U.S. crude oil production in the week ended October 28 fell -0.8% w/w to 11.9 million bpd, which is only -1.2 million bpd (-9.2%) 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.
 

• Crude Moderately Higher on Speculation China Might Soon End Covid Zero Policies
• Crude Jumps on Speculation China Might Soon End Covid Zero Policies
• Crude Oil Under Pressure from Weak Chinese Economic Data
• Crude Oil Under Pressure from Weak Chinese Economic Data