Crude Falls Back from a 3-Week High as Covid Surges Through China

Feb WTI crude oil (CLG23) on Tuesday closed down -0.03 (-0.04, and Feb RBOB gasoline (RBG23) closed down -2.04 (-0.85%).  

Crude oil and gasoline prices on Tuesday settled mixed, with gasoline posting a 1-month high.  Crude prices Tuesday fell back from a 3-week high and closed slightly lower on concern that surging Covid infections in China will sharply reduce the country's energy demand in the short term.  Crude prices Tuesday initially moved higher on hopes that Chinese energy demand will improve after China further unwound Covid restrictions.  Also, a cold snap in the U.S. has shuttered refining capacity along the Texas Gulf Coast.  

Crude oil prices Tuesday initially pushed higher after China said that it would reopen its borders from Covid curbs and eliminate quarantine restrictions for inbound travelers starting January 8.  However, the impact of easing Covis restrictions is limited as soaring Covid infections in China have kept people at home, reducing economic activity and travel.  Air travel in China remains in a slump as a report from VariFlight shows the number of flights in China on Dec 22 fell to 42% of 2019 levels.

Crude prices have support on reduced fuel supplies in the U.S. after severe cold temperatures in the South forced more than a third (36%) of refiners along the Texas Gulf Coast to shut production.  Refiners may take up to two weeks to restart refining operations once temperatures warm.

Crude oil prices have support after Russia's Deputy Prime Minister Alexander Novak was quoted by the state-run Tass news service last Friday as saying that Russia may cut production by 500,000-700,000 bpd in response to Europe’s partial oil embargo on Russian oil imports.  Russia has threatened to retaliate for the European oil embargo and price cap and may be trying to talk oil prices higher.  However, the embargo seems to be having a significant impact, as Bloomberg reports that total oil shipment volume from Russia in mid-December fell sharply by -54%.

TC Energy received approval to restart the Keystone pipeline and targets the full return of the pipeline capacity by December 28 or 29.  TC Energy has already restarted several sections of the Keystone pipeline, including the sections between Cushing and the Gulf Coast.  The pipeline shutdown, which began on December 8, has put downward pressure on U.S. crude oil inventories at Cushing and Gulf ports.  The Keystone pipeline normally carries more than 600,000 bpd of crude and links oil fields in Canada to Cushing, OK, and to refiners on the U.S. Gulf Coast.

OPEC+ on December 4 decided to keep the group's crude production targets unchanged for January, in line with expectations.  OPEC crude production in November fell 1.05 million bpd to a 5-month low of 28.79 million bpd.

In an underlying supportive factor for crude oil prices, Europe on December 5 embargoed nearly all seaborne oil imports from Russia.  In addition, Germany and Poland have pledged to halt pipeline oil imports from Russia of about 500,000 bpd as of year-end.

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 +24% w/w to 84.42 million bbls in the week ended December 23.

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of December 16 were -7.2% below the seasonal 5-year average, (2) gasoline inventories were -1.9% below the seasonal 5-year average, and (3) distillate inventories were -7.6% below the 5-year seasonal average.  U.S. crude oil production in the week ended December 16 was unchanged w/w to 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 December 23 rose by +2 rigs to 622 rigs, modestly below the 2-1/2 year high of 627 rigs posted on December 2.  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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