DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange eroded further in overnight trade after China locked down a key manufacturing hub in the southern province of Guangdong in an attempt to stamp out a widening COVID-19 outbreak with demand-sapping quarantine controls, while an unexpected build in U.S. crude oil inventories for the first week of November further weighed on the oil complex.

The American Petroleum Institute reported late Tuesday that commercial crude oil stocks jumped 5.618 million barrels (bbl) last week, compared with calls for a 200,000 bbl decline. If confirmed by the U.S. Energy Information Administration (EIA) data scheduled for mid-morning release, this would mark the second consecutive weekly build in domestic oil stockpiles that would lift inventories to about 2% below the five-year average. Stocks at the Cushing, Oklahoma, tank farm -- the New York Mercantile Exchange delivery point for West Texas Intermediate futures -- dropped 1.848 million bbl through Nov. 4 while inventory from the Strategic Petroleum Reserve was drawn down 3.6 million bbl. Further details of the report showed gasoline stocks rose 2.553 million bbl, missing calls for an expected 1.1 million bbl draw. Middle distillate inventories dropped 1.773 million bbl in the reviewed week, about twice the expected 900,000 bbl decline. The EIA estimates domestic distillate fuel oil inventories to currently stand near 106.8 million bbl -- the lowest end-of-October level since 1951. For the next year, distillate inventories are forecast to remain around 17% below the five-year average. Next, oil traders will parse through the official inventory report from the EIA scheduled for 10:30 a.m. EST.

The oil complex once again came under selling pressure from bearish headlines out of China, where authorities in the manufacturing hub of Guangzhou shut down several districts, restricting movement for millions of its residents. The city of 19 million people is the capital of Guangdong province, a major economic powerhouse for China and a global manufacturing hub. Earlier this week, health authorities in Beijing closed some of the public schools and restricted access to the city amid yet another surge in coronavirus infections which have spread like wildfire through the nation's largest cities. Even in places not under immediate lockdowns, the constant COVID testing and stringent travel restrictions are constraining mobility. Oil markets remain sensitive to headlines out of China, the world's top oil importer, which probably lost around 1 million barrels per day (bpd) in fuel consumption due to extended lockdowns.

The economic impact of COVID controls reared its head into China's inflation data released overnight, showing wholesale prices paid to factories falling by 1.3% in October, down from a rise of 0.9% in September. This marked the first price deflation at China's factories since the beginning of 2020 as zero-COVID weighed on domestic consumption. This rate has been falling every month since hitting 13.5% in October 2021, which was the fastest pace in 26 years, although China's PPI last turned negative in December 2020 when it dropped to minus 0.4% at the outbreak of the COVID-19 pandemic.

China's economy is likely to slow down further in the fourth quarter after experiencing a moderate 3.9% growth reported for the third quarter.

Separately, the EIA in its Short-Term Energy Outlook released Tuesday raised the domestic crude oil production estimate this year to 11.83 million bpd, up 20,000 bpd from last month's assessment. Next year, U.S. crude production would increase to 12.31 million bpd, matching the prior record high set in 2019, according to their projection.

"Growth in OPEC and non-OPEC oil production -- most notably production in the United States -- keeps the Brent crude oil price in our forecast lower on an annual average basis in 2023 than in 2022, said the EIA in its November outlook. "However, we expect the Brent crude oil price will begin rising in 2H23." For Organization of the Petroleum Exporting Countries, the EIA held its production forecast for this and next year unchanged at 34.09 million bpd and 34.37 million bpd, respectively. The forecast follows a 2 million bpd production cut announced by the cartel in cooperation with Russia-led producers made in early October which took effect this month.

Near 7.00 a.m. EST, NYMEX WTI for December delivery fell $0.80/bbl to $88.12/bbl, and ICE January Brent dropped below $95/bbl, down $0.76/bbl in overnight trading. NYMEX December RBOB futures declined $0.0321 to $2.6045 a gallon, and December ULSD futures retreated $0.0553 to $3.7154 a gallon.

Liubov Georges can be reached at Liubov.Georges@dtn.com