Crude Slumps on Chinese Energy Demand Concerns

Feb WTI crude oil (CLG23) this morning is down -3.44 (-4.47%), and Feb RBOB gasoline (RBG23) is down -10.28 (-4.31%).  Feb Nymex natural gas (NGG23) is up +0.180 (+4.51%).

Crude oil and gasoline this morning are falling sharply for a second day, with crude posting a 3-week low and gasoline falling to a 1-1/2 week low.  Energy prices are under pressure on concern the pandemic in China may worsen before it improves, which would depress energy demand as it takes longer for the economy to recover.

Crude prices extended their losses after today's news showed that U.S. manufacturing activity in December contracted at the steepest pace in 2-1/2 years, a bearsih factor for energy demand.

Feb nat-gas this morning is moderately higher as a weaker dollar sparked some short-covering in nat-gas futures.  Nat-gas prices have been under pressure over the past three weeks and dropped to an 11-month nearest-futures low Tuesday as a warmer-than-normal winter thus far has reduced heating demand for nat-gas.  The National Oceanic and Atmospheric Administration (NOAA) expects above-normal temperatures for most of Europe over the next two weeks and for the U.S. through mid-January.

Today's U.S. economic news was mixed for crude prices.  On the bearish side, the Dec ISM manufacturing index fell -0.6 to a 2-1/2 year low of 48.4.  Conversely, Nov JOLTS job openings fell -54,000 to 10.458 million, showing a stronger labor market than expectations of 10.050 million.

Crude prices are falling today after researcher Airfinity Ltd projected China could see as many as 25,000 deaths a day from Covid later this month and could see 1.7 million deaths from this current wave of infections.  The spread of infections during China's week-long Lunar New Year holiday that begins on January 21 may keep the economy from fully reopening and negatively affect energy demand.

Weakness in the crude crack spread is bearish for crude prices after the crack spread fell to a 1-1/2 week low today.  A weaker crack spread discourages refiners from boosting crude purchases to refine the crude into gasoline and distillates.

Increased OPEC crude output is bearish for oil prices.  OPEC Dec crude production rose +150,000 bpd to 29.140 million bpd.  OPEC+ on December 4 decided to keep the group's crude production targets unchanged for January, in line with expectations.  OPEC+ will meet again on February 1 to discuss its production targets.

Crude oil prices have support after Russia's Deputy Prime Minister Alexander Novak said in late December that Russia might cut production by 500,000-700,000 bpd in response to Europe’s partial oil embargo on Russian oil imports.  The European embargo is having a significant impact, as Bloomberg reports that total oil shipment volume from Russia in mid-December fell sharply by -54%.

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 +11% w/w to 98.50 million bbls in the week ended December 30.

Last Thursday's EIA report showed that (1) U.S. crude oil inventories as of December 23 were -6.4% below the seasonal 5-year average, (2) gasoline inventories were -4.1% below the seasonal 5-year average, and (3) distillate inventories were -7.2% below the 5-year seasonal average.  U.S. crude oil production in the week ended December 23 fell -0.8% w/w 12.0 million bpd, which is only 1.1 million bpd (-8.4%) 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 30 fell by -1 rig to 621 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.

• Nat-Gas Prices Plunge on Warm Temps in the Northern Hemisphere
• Crude Tumbles on Dollar Strength while Nat-Gas Plunges on Warm Temps
• Nat-Gas Prices Fall as Warm U.S. Temps Undercut Heating Demand
• Crude Gains on Dollar Weakness and Chinese Energy Demand Optimism