Crude Prices Underpinned by Chinese Energy Demand Optimism

Jan WTI crude oil (CLF23) on Thursday closed up +0.67 (+0.83%), and Jan RBOB gasoline (RBF23) closed down -4.27 (-1.79%).  

Crude oil and gasoline prices Thursday settled mixed, with crude climbing to a 2-week high.  A slump in the dollar index to a 3-1/2 month low Thursday was bullish for energy prices.  Also, crude rose on expectations that energy demand will improve in China after the government eased Covid restrictions.  However, crude prices fell back from their best levels, and gasoline declined, on concern the U.S. economy is weakening after Thursday's news that the Nov ISM manufacturing index contracted at the steepest pace in 2-1/2 years, a bearish sign for energy demand.

Crude prices moved higher this week after China eased Covid restrictions in some parts of the country, which sparked some optimism about an economic reopening.  China on Wednesday lifted lockdowns in Guangzhou's southern manufacturing hub, removed lockdown restrictions in the main urban areas of Zhengzhou, and said it would gradually lift lockdowns in Chongqing.  Also,  China's top official in charge of fighting Covid-19 said Thursday that China's efforts to combat the virus are entering a new phase, with the omicron variant weakening and more Chinese getting vaccinated.  In addition, Beijing is now allowing some Covid patients to isolate at home.  Still, China reported a record 38,808 new Covid infections on Sunday, which indicates continued pressure on the government to combat the spreading virus.  Analytics firm Kpler said Chinese oil demand could average 15.11 million bpd in Q4, down -4.5% from 15.82 million bpd a year ago.

Oil prices are seeing support ahead of more European sanctions on Russian oil beginning December 5.  Meanwhile, the markets are waiting for details on the EU and G-7 plan for a Russian oil price cap, which would prevent companies from providing shipping and related services for Russian oil unless that oil is sold below the cap price.  The price-cap plan should support global oil prices since it is designed to crimp Russian oil exports and thereby reduce the supply of world oil.

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 +2.2% w/w to 103.13 million bbls in the week ended November 25.

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 November fell 1.05 million bpd to a 5-month low of 28.79 million bpd.

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of November 25 were -8.1% below the seasonal 5-year average, (2) gasoline inventories were -3.4% below the seasonal 5-year average, and (3) distillate inventories were -10.6% below the 5-year seasonal average.  U.S. crude oil production in the week ended November 25 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 Wednesday that active U.S. oil rigs in the week ended November 25 rose by +4 rigs to a 2-1/2 year high of 627 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.
 

• Crude Rallies on Dollar Weakness and Chinese Energy Demand Optimism
• Crude Oil Rises on China Hopes and Crude Inventory Decline
• Crude Rallies on China Hopes and Slump in EIA Crude Inventories
• Crude Closes Moderately Higher on Speculation OPEC+ Will Cut Crude Output