Crude Sharply Lower on Dollar Strength and Rising China Covid Infections

Dec WTI crude oil (CLZ22) on Thursday closed down by -3.95 (-4.62%), and Dec RBOB gasoline (RBZ22) closed down by -5.33 (-2.13%).  

Crude oil and gasoline prices Thursday sold off sharply, with crude falling to a 1-month low and gasoline tumbling to a 1-1/2 month low.  Strength in the dollar Thursday undercut energy prices.  Also, soaring Covid infections in China and potential new pandemic restrictions are bearish for energy demand and crude prices.  In addition, a slump in stocks Thursday has dampened optimism in the economic outlook, which is bearish for energy demand and crude prices.

Chinese energy demand concerns remain an underlying bearish for crude prices after China reported 23,132 new Covid infections on Wednesday, the most in 6-1/2 months and more than double the amount since last Friday.  Nomura reported that more than 10% of China's total gross domestic product was under some form of lockdown as of November 3.  However, there are hopes for an easing of some restrictions.  Last Friday, China cut the time foreign travelers into China must quarantine to five days in a hotel or government facility, followed by three days confined at home from the current policy of 10 days in quarantine.  Also, China scrapped the system that penalized airlines for bringing virus cases into China.  Ctrip.com reported that booking for flights into China doubled in the hour after the government announced an easing of restrictions for inbound travelers.

U.S. economic data Thursday was mixed for energy demand and crude prices.  On the negative side, Oct building permits, a proxy for future construction, fell -2.4% m/m to a 2-year low of 1.526 million.  Also, the Nov Philadelphia Fed business outlook survey unexpectedly fell -10.7 to a 2-1/2 year low of -19.4, weaker than expectations of an increase to -6.0.  Conversely, weekly initial unemployment claims unexpectedly fell -4,000 to 222,000, showing a stronger labor market than expectations of an increase to 228,000.

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 -8.2% w/w to 79.92 million bbls in the week ended November 11.

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 November 11 were -4.3% below the seasonal 5-year average, (2) gasoline inventories were -5.0% below the seasonal 5-year average, and (3) distillate inventories were -15.4% below the 5-year seasonal average.  U.S. crude oil production in the week ended November 11 was unchanged w/w at 12.1 million bpd, which is only -1.0 million bpd (-7.6%) 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 11 rose by +9 rigs to a 2-1/2 year high of 622 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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