Crude Rallies on Dollar Weakness and Outlook for Less Fed Tightening

Feb WTI crude oil (CLG23) this morning is up +1.58 (+2.04%), and Feb RBOB gasoline (RBG23) is up +5.64 (+2.32%).  Feb Nymex natural gas (NGG23) is up +0.218 (+5.94%).

Crude oil and gasoline prices this morning climbed to new 1-week highs and are moderately higher.  Today's sell-off in the dollar index to a 7-month low is bullish for energy prices.  Also, today's U.S. Dec CPI report showed a further slowdown in inflation, which may lead to less-aggressive Fed tightening that would benefit economic growth and energy demand.

Feb nat-gas prices this morning are sharply higher on expectations for colder U.S temperatures later this month, which will boost heating demand for nat-gas.  Forecaster Maxar Technologies said today that below-normal temperatures are seen from the West to Midwest from Jan 22-26.  Nat-gas prices rallied today despite a bearish EIA inventory report that showed nat-gas supplies unexpectedly rose +11 bcf last week versus expectations of a -12 bcf decline.

Crude prices have support from signs of stronger energy demand in China.  On Monday, China boosted its crude import quotas, a sign from the world's largest crude importer that it is gearing up to meet higher demand.  As of this week, China has issued a combined 132 million metric tons (MMT) of quotas for crude imports in 2023, well above the quota for 109 MMT at the same time last year.      

Strength in the crude crack spread is bullish for oil prices.  The crack spread today climbed to a 1-1/2 week high, encouraging refiners to boost their crude oil purchases and refine it into gasoline and distillates.

Crude prices garnered support Wednesday on a forecast from Goldman Sachs for Brent crude to rally to $110 per bbl by Q3 if China and other Asian economies fully reopen from Covid restrictions.  Also, ING Groep NV late Tuesday projected Brent crude prices would average $104 per barrel this year as China reopens and Russian supply drops.  

Saudi Arabia's state-controlled Saudi Aramco last Thursday reduced its crude oil prices to customers, which was bearish for crude oil prices.  Saudi Aramco cut its price of Arab Light grade crude to Asian customers for delivery in Feb by -$1.45 per barrel and also cut prices for its customers in Europe and the Mediterranean region.

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 found 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 bullish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week fell -5.9% w/w to 89.52 million bbl in the week ended January 6.

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of January 6 were +0.4% above the seasonal 5-year average, (2) gasoline inventories were -7.0% below the seasonal 5-year average, and (3) distillate inventories were -17.1% below the 5-year seasonal average.  U.S. crude oil production in the week ended January 6 rose +0.8% w/w to 12.2 million bpd, which is only 0.9 million bpd (-6.9%) 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 January 6 fell by -3 rigs to 618 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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