Crude Oil Falls on Concern Tighter Fed Policy Will Crimp Energy Demand

April WTI crude oil (CLJ23) on Wednesday closed down -2.41 (-3.16%), and Apr RBOB gasoline (RBJ23) closed down -7.31 (-2.79%).  

Crude oil and gasoline prices Wednesday sold off sharply, with crude falling to a 2-1/2 week low and gasoline dropping to a 2-week low.  A stronger dollar Wednesday weighed on energy prices.  Crude oil prices also saw downward pressure from Wednesday's hawkish minutes of the Jan 31-Feb 1 FOMC meeting that showed policymakers anticipated further rate hikes for longer, which would slow economic growth and energy demand.  In addition, Wednesday's slide in the  S&P 500 to a 4-week low undercut optimism in the economic outlook, which was bearish for energy demand.

Crude prices dropped about -10 cents/bbl from their Wednesday afternoon closing level when the API reported that U.S. crude supplies rose +9.9 million bbl last week.  The consensus is for Thursday's weekly EIA crude inventories to increase by +2.8 million bbl.

A supportive factor for crude is strength in the crude crack spread as the crack spread Wednesday climbed to a 2-week high.  The stronger crack spread encourages refiners to boost crude purchases to refine into gasoline and distillates.

Recent Chinese news shows an uneven economic recovery that is bearish for energy demand.  In January, China's car production and sales fell more than -30% from a year ago.  Also, China's housing market remains in a slump as Jan home sales for the top hundred Chinese developers fell -33% y/y.  On the positive side, increasing Chinese air travel supports fuel demand and crude prices.  The Civil Aviation Administration of China (CACC) reported 55.2 million air passenger trips in China from January 7 to February 15, up +39% from the same time last year and at 76% of 2019's level.

In a bullish factor, Vortexa on Monday reported that the amount of crude stored on tankers that have been stationary for at least a week fell -8.4% w/w to 71.27 million bbl in the week ended February 17.

On February 1, 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 at about 2 million bpd, in the second half of this year when accelerating demand will tighten the market.  OPEC crude production in January fell by -60,000 bpd to 29.12 million bpd.  Saudi Arabian Energy Minister Abdulaziz bin Salman last Thursday said the OPEC+ alliance plans to maintain its oil deal set in October for the rest of this year.  Also, UAE Energy Minister Suhail Al Mazrouei said last Monday that despite Russia's plan to cut crude output, global oil markets remain balanced, and OPEC+ producers don't need to intervene.

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of February 10 were +7.3% above the seasonal 5-year average, (2) gasoline inventories were -4.9% below the seasonal 5-year average, and (3) distillate inventories were -15.3% below the 5-year seasonal average.  U.S. crude oil production in the week ended February 10 was unchanged w/w at a 2-3/4 year high of 12.3 million bpd, which is only 0.8 million bpd (-6.1%) 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 February 17 fell by -2 rigs to 607 rigs, moderately 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.
 

• Crude Oil Under Pressure on Concern about Hawkish Fed
• Crude Prices Modestly Lower on Uneven Recovery in China
• Crude Prices Slip on Uneven Recovery in China
• Crude Prices Retreat on Dollar Strength and Global Economic Concerns