DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange turned lower in afternoon trade Wednesday, with the U.S. and international crude benchmarks settling another session of volatile trading with modest losses, pressured by tightening controls on international air travel and accelerated gains in domestic crude oil production that surged to an 18-month high last week, heightening concerns over a buildup in global oil inventories as early as the first quarter next year.

The Biden administration is rapidly tightening COVID-19 controls on international travel. Media airwaves were hit with reports on Tuesday that the White House would soon require all travelers, including U.S. citizens, to be tested within a day before boarding an inbound flight.

California detected the nation's first case of the Omicron variant on Wednesday, according to the Centers for Disease Control and Prevention. Internationally, Japan and Israel suspended all inbound flights for December as the world awaits more data on the new variant. So far, the Omicron variant appears to be quite transmittable but have not yielded cases of severe illness. The variant is now in at least 21 countries.

After showing growth early in the fourth quarter, the long-awaited recovery in jet fuel demand has now been pushed further in 2022 as consumers begin to pull back on international air travel. As this pocket of demand evaporates, the oil market is left with a big hole that is seen rapidly expanding with more non-OPEC supplies hitting the market. S&P Platts Analytics estimate global oil demand will likely contract by a sharp 1.6 million barrels per day (bpd) from the fourth quarter to the first quarter of 2022, on a combination of seasonal weakness and winter resurgence of COVID-19 infections.

Against this backdrop, Organization of the Petroleum Exporting Countries together with ten producers outside the cartel are scheduled to meet Thursday via videoconference to decide on production policy for January. Analysts expect the group will pause its planned 400,000 bpd output increase until February to make up for the lost demand. Ahead of the meeting, Russia and Iraq voiced their support to leave the agreement as it is but the stance of more hawkish members such as Saudi Arabia remains unclear.

OPEC+ has so far downplayed the risk from the Omicron variant, describing the recent selloff as "extremely emotional and short-lived response" without any support from scientific data. OPEC+ is gradually unwinding their record 9.7 million bpd production cuts that were put in place in April 2020 in 400,000 bpd monthly installments. OPEC+ still has about 3.8 million bpd of these cuts in place and some analysts suggest that should the coalition choose to support prices against the threat of the emerging variant, it might forgo planned increases until February, buying more time for the market to recover.

Midmorning inventory report released by U.S. Energy Information Administration was mostly bearish, detailing a large drop in gasoline demand during the Thanksgiving holiday week, while fuel stockpiles unexpectedly surged. Gasoline inventories jumped 4 million barrels (bbl) to 215.4 million bbl compared with analyst expectations for inventories to have decreased 500,000 bbl. Gasoline supplied to the U.S. market, a measure of demand, declined 538,000 bpd last week to 8.796 million bpd, likely reflecting demand pulled forward during the previous week as suppliers staged product near retail centers.

Distillate stocks, meanwhile, rose 2.2 million bbl to 123.9 million bbl last week, and are now about 9% below the five-year average, EIA said. Analysts expected distillate inventories would remain unchanged from the previous week. Distillate supplied to the U.S. market decreased by 182,000 bpd from the previous week to 4.209 million bpd. Distillate demand looks to have peaked for the fourth quarter, albeit at a far higher level than was seen both last year and in 2019.

Offsetting bearish parts of the report, U.S. crude oil inventories decreased by 909,000 bbl from the previous week to 433.1 million bbl compared with expectations for stocks to have added 800,000 bbl. The draw was realized even as domestic refiners raised run rates by a modest 0.2% to 88.8%, missing market expectations for a 0.6% increase. U.S. producers, meanwhile, raised production by 100,000 bpd to 11.6 million bbl -- the highest weekly output rate since April 2020 when the coronavirus pandemic reigned havoc on the domestic oil industry. U.S. oil production still stands 1.4 million bpd below its pre-pandemic peak of 13 million bpd.

On the session, West Texas Intermediate January futures declined $0.61 bbl to settle at $65.57 and International benchmark ICE February Brent contract fell $0.36 to $68.87 bbl. NYMEX RBOB January futures settled the session 1.10 cents higher at $1.9511 gallon, and the new front-month NYMEX ULSD contract gained 1.68 cents to $2.0771 gallon.