Crude Oil Falls as Pandemic Lockdowns Curb Chinese Energy Demand

Dec WTI crude oil (CLZ22) this morning is down by -1.06 (-1.10%), and Dec RBOB gasoline (RBZ22) is up +2.99 (+1.13%).  Dec Nymex natural gas (NGZ22) is down -0.657 (-9.46%).

Crude oil and gasoline prices this morning are mixed.  Crude prices are under pressure on concern that rising Covid cases in China will force the government to expand pandemic lockdowns that will undercut economic activity and energy demand.  However, crude oil is seeing underlying support from a tumble in the dollar index (DXY00) to a 1-1/2 month low.

Dec nat-gas this morning is sharply lower on concern U.S. nat-gas exports will be delayed, which would cause a build of inventories.  The Freeport LNG export terminal, which was knocked offline by an explosion on June 8, has yet to announce when it will resume operations.  Last month, the terminal said it would reopen on Nov 21.  The Freeport terminal accounts for about 20% of all U.S. nat-gas exports, and a further delay in reopening will lead to an increase in U.S. nat-gas inventories.

Chinese energy demand concerns are negative for crude prices after China reported 7,323 new Covid infections on Monday, the most in more than six months.  Chinese health officials Saturday said the country would “unswervingly” adhere to its Covid Zero strategy, which has caused lockdowns and weak energy demand in China.  Nomura reported that more than 10% of China's total gross domestic product was under some form of lockdown as of last Thursday, up from 9.5% last Monday.  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.

In a bullish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week fell -18% w/w to 84.75 million bbls in the week ended November 4.

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.  

Last 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 November 4 rose by +3 rigs to a 2-1/2 year high of 613 rigs.  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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