Crude Gains on Chinese Energy Demand Optimism

Feb WTI crude oil (CLG23) this morning is up +0.35 (+0.44%), and Feb RBOB gasoline (RBG23) is up +5.39 (+2.08%).  Feb Nymex natural gas (NGG23) is up +0.075 (+2.29%).

Crude oil and gasoline prices this morning are moderately higher, with gasoline climbing to a 2-month high.  The outlook for Chinese energy demand to strengthen as China's economy reopens from pandemic lockdowns is a major bullish factor for crude prices.  However, a stronger dollar today is limiting the upside in energy prices.  

Feb nat-has prices this morning rebounded from a new 19-month nearest-futures low and are moderately higher.  Short-covering emerged in nat-gas futures today after updated weather forecasts called for below-normal U.S. temperatures toward the end of this month.  The colder temperatures will boost heating demand for nat-gas.

A reduction in crude supplies from Canada is a positive factor for oil prices.  Two of Canada's largest oil-sands upgrading facilities, Syncrude Canada and Canadian Natural Resources Horizon, are facing disruptions due to power outages caused by ice accumulation.  Also, the Pembina Pipeline has curbed crude flows due to an oil spill.  Canada is a major supplier of crude to U.S. refineries, and prolonged outages may tighten fuel inventories across the U.S.  

Strength in the crude crack spread is positive for oil prices after the crack spread today rose to a 2-1/2 month high.  The higher crack spread encourages refiners to boost their crude purchases to refine it into gasoline and distillates.

Crude prices have support as the removal of pandemic travel restrictions has bolstered expectations for a jump in domestic and international flights in China during the week-long Lunar New Year that begins on January 21.

China boosted its crude import quotas last Monday, 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.      

In a note to clients Monday, Goldman Sachs said oil market participants are preparing for a recession that is unlikely to materialize, and oil markets are unprepared for the sequential demand growth this year as China reopens and travel continues to recover.  As a result, Goldman Sachs predicts Brent crude will reach $105 a bbl by Q4 and average $97.50 a bbl this year.  

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 -8.9% w/w to 85.39 million bbl in the week ended January 13.

Thursday's EIA report showed that (1) U.S. crude oil inventories as of January 13 were +3.0% above the seasonal 5-year average, (2) gasoline inventories were -7.7% below the seasonal 5-year average, and (3) distillate inventories were -19.7% below the 5-year seasonal average.  U.S. crude oil production in the week ended January 13 was unchanged w/w at 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 13 rose by +5 rigs to 623 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 Fall on Ample U.S. Nat-Gas Inventories
• Crude Prices Underpinned by Outlook for Stronger Chinese Energy Demand
• Nat-Gas Prices Plunge as U.S Temps Shift Warmer
• Crude Rallies on Dollar Weakness and Chinese Energy Demand Optimism