DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied to fresh, better-than-10-month highs Wednesday, continuing Tuesday's sharp advance triggered by a surprise production cut announced by Saudi Arabia that was further boosted by a large weekly crude draw from domestic commercial inventory, with the contracts paring the advance following the close after protestors stormed the U.S. Capitol.

Shrugging off a big drop in implied demand during the final week of 2021, traders instead focused on a larger-than-expected 8 million barrel (bbl) draw in commercial crude oil inventory that pressed stocks down to a 485.5 million bbl, 2-month low. The decline in domestic crude supply joined by the Saudi announcement Tuesday that it would reduce output by 1 million barrels per day (bpd) for both February and March set the tone for the potential for further stock drawdowns during the first quarter. Additionally, Tuesday's OPEC+ agreement will limit monthly production increases to 150,000 bpd for February and March instead of potential 500,000 bpd monthly increases, with both Russia and Kazakhstan allotted 75,000 bpd monthly output hikes.

The news continued to support the market advance despite weak demand, with total oil products supplied to the U.S. market plunging 2.263 million bpd to a nearly 4-month low at 17.054 million bpd in ending 2021, data released from the Energy Information Administration at midmorning shows. Implied gasoline demand plunged 687,000 bpd to a 7.441 million bpd more than 7-month low, with the previous low plumbed during widespread government lockdowns in May. Implied distillate demand plunged by 653,000 bpd to below 3 million bpd for the first time since late May.

Considering the demand drop occurred during the holidays while COVID-19 infections are soaring, the market looked to an expected recovery in demand later this year as vaccination programs continue to ramp up. The Centers for Disease Control and Prevention reported 17,288,950 vaccine doses have been distributed in the United States as of 9 a.m. EST Wednesday, with 5,306,797 individuals receiving initial doses in the 2-dose vaccination process.

Still, there have been widespread complaints on the slowness in distributing vaccines while the United States is in the midst of a second wave of infections. John Hopkins University's COVID-tracker indicates new infections reached a pandemic peak in the United States on Jan. 2 at 297,491, while there has been a total of 359,593 U.S. deaths since the start of the pandemic.

The pandemic is again heightening economic damage, with payroll processor ADP this morning reporting a 123,000 drop in private-sector employment from November to December, with the leisure and hospitality sector losing 58,000 jobs. The Labor Department will release initial unemployment claims filing for the week ended Jan. 2 Thursday morning, with the market expecting first-time filings to have increased by more than 10,000 to 800,000 from the previous week. The market anticipates the Labor Department's nonfarm payroll report to be released Friday morning to show a modest 68,000 increase in new jobs.

At settlement, February West Texas Intermediate futures gained $0.70 to $50.63 bbl while the ICE February Brent contract also advanced $0.70 to $54.30 bbl. NYMEX ULSD futures ended the session 0.98 cents higher at $1.5287 gallon, with the February RBOB contract gaining 2.29 cents with a $1.4750 gallon settlement.

Gains were pared shortly after market-on-close trade, briefly turning negative on news protestors breached the U.S. Capitol, disrupting the certification of President-elect Joe Biden by a joint session of the U.S. Congress. The Capitol was placed in lockdown with evacuations, including U.S. Vice President Mike Pence. The D.C. National Guard was activated, and there are reports one person was shot inside the Capitol.

Brian L. Milne can be reached at brian.milne@dtn.com