Dollar Strength and Suspect Chinese Energy Demand Weighs on Crude Prices

Mar WTI crude oil (CLH23) this morning is down -0.91 (-1.20%), and Mar RBOB gasoline (RBH23) is down -8.07 (-3.29%).  March Nymex natural gas (NGH23) is down -0.094 (-3.83%).

Crude oil and gasoline prices this morning dropped to 3-week lows and are moderately lower.  A rally in the dollar index (DXY00) today to a 3-week high is undercutting energy prices.  Crude is also under pressure on signs of an uneven recovery in China, keeping the country's energy demand depressed.  Losses in crude were limited on signs of strength in the U.S. economy after Jan payrolls and the Jan ISM services index rose more than expected.

March nat-gas today tumbled to a 2-year nearest-futures low.  The warmer-than-normal U.S. winter has curbed heating demand for nat gas and boosted inventories.  Thursday's EIA report showed that U.S. nat-gas inventories are 6.7% above the five-year average, the biggest surplus in 2 years.  In addition, the Commodity Weather Group said temperatures would climb to above-normal levels across the eastern half of the U.S. next week, easing heating demand and potentially boosting nat-gas inventories even higher.  

An uneven recovery in China's economy from ending pandemic restrictions is negative for crude prices.  Although a surge in consumer spending last month during the Lunar New Year holiday spurred optimism about China's rebound, signs of weakness among manufacturers and sales of cars and homes signal the recovery isn't yet on a sure footing.

Today's U.S. economic data signals economic strength that supports energy demand and crude prices.  Jan nonfarm payrolls surged +517,000, much stronger than expectations of +188,000 and the largest increase in 6 months.  Also, the Jan unemployment rate unexpectedly fell -0.1 to a 53-year low of 3.4%, showing a stronger labor market than expectations of an increase to 3.6%.  In addition, the  Jan ISM services index rose +6.0 to 55.2, stronger than expectations of 50.5.

The crude crack spread today dropped to a 4-week low and is bearish for crude prices.  Weakness in the crack spread discourages refiners from purchasing crude oil to refine it into gasoline and distillates.

On Wednesday, the OPEC+ Joint Ministerial Monitoring Committee recommended keeping crude production levels steady as the oil market awaits clarity on demand in China and crude supplies from Russia.  Goldman Sachs predicts that OPEC+ will only start to reverse its supply cuts, currently about 2 million bpd, in the second half of this year when accelerating demand will tighten the market.

Signs of strength in Chinese fuel demand support crude prices after Sinopec reported that retail gasoline sales at gas stations affiliated with Sinopec in China rose +20% over the Lunar New Year break compared to the same period last year.  Also, China's Civil Aviation Administration reported that China's domestic air travel surged during the week-long holiday by 79.8% compared with the same period in 2022.  

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 -16% w/w to 75.20 million bbl in the week ended January 27.

A reduction in OPEC crude output is bullish for oil prices.  OPEC Jan crude production fell -60,000 bpd to 29.12 million bpd.  OPEC+ on December 4 decided to keep the group's crude production targets unchanged for January, in line with expectations.

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of January 27 were +3.5% above the seasonal 5-year average, (2) gasoline inventories were -6.8% 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 27 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 27 fell by -4 rigs to 609 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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