Crude Prices Decline on Dollar Strength and Energy Demand Concerns

Dec WTI crude oil (CLZ22) this morning is down -1.35 (-1.50%), and Dec RBOB gasoline (RBZ22) is down -2.89 (-1.07%).  Dec Nymex natural gas (NGZ22) is down -0.170 (-2.71%).

Crude oil and gasoline prices this morning are moderately lower.  A rally today in the dollar index to a 1-1/2 week high is weighing on energy prices.  Also, crude prices are under pressure after Wednesday's comments from Fed Chair Powell signaled that interest rates will go higher than previously expected, which could push the economy into recession and undercut energy demand.

Dec nat-gas prices this morning are moderately lower after weekly EIA nat-gas supplies rose more than expected.  The EIA reported today that EIA nat-gas inventories rose +107 bcf last week, above expectations of +102 bcf and well above the 5-year average for this time of year at +45 bcf.  Also, record warm temperatures in the U.S. will curb heating demand for nat-gas as the Commodity Weather Group said above-normal temperatures are expected in the Central and Eastern half of the U.S. through the end of next week.

Crude prices also fell back today after China’s National Health Commission said the country would “resolutely adhere” to the country’s Covid Zero approach, dampening speculation China would soon ease Covid Zero policies.

Today's U.S. economic news was mixed for energy demand and crude prices.  On the negative side, the Oct ISM services index fell -2.3 to a 2-1/2 year low of 54.4, weaker than expectations of 55.3.  Conversely, weekly initial unemployment claims unexpectedly fell -1,000 to 217,000, showing a stronger labor market than expectations of an increase to 220,000.

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.  

Wednesday'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 Rallies on Chinese Energy Demand Optimism and a Drop in EIA Inventories
• Crude Rallies on Chinese Energy Demand Optimism and a Fall in EIA Inventories
• Crude Moderately Higher on Speculation China Might Soon End Covid Zero Policies
• Crude Jumps on Speculation China Might Soon End Covid Zero Policies