DTN Oil

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange moved lower early Thursday, as spiking COVID cases in China, and the lack of transparency by Beijing in what those numbers are, prompted the market to dial back expectations for a near-term recovery in China's demand for oil.

Beijing's sudden reversal of its zero-COVID policy earlier this month was a surprise by the communist regime that initially rallied markets on the expectation that the end of three years of lockdowns would unleash a surge in demand for commodities by Asia's largest economy. While China's oil consumption is expected to grow sharply in 2023 -- the Energy Information Administration projects a 600,000 barrels per day (bpd) or 4% year-on-year expansion in oil demand to 15.76 million bpd -- a sharp increase in demand early next year is doubtful.

Markets also worried on Wednesday that the end of many travel restrictions by Beijing may lead to growing COVID cases around the globe that could slow economic growth. These concerns were highlighted when half of the travelers on two planes from China to Milan, Italy, tested positive for COVID. The United States on Wednesday imposed restrictions on travelers departing from China, Hong Kong, or Macau. Taking effect Jan. 5, all passengers at least two years old on flights originating from these locations will be required to show a negative COVID-19 test no more than two days from their departure date. Other countries are considering similar restrictions.

Health authorities in China recently suggested the wave of COVID cases is peaking, but the veracity of their statements is questioned. Within China, as cases spike, infected workers won't be found on factory floors or at ports, while those not infected might be reluctant to reengage in society. Markets are looking to the Chinese New Year on Jan. 22 -- usually a busy time when Chinese travel to celebrate with family -- to better understand the dynamics within China's society in how they are contending with spiking COVID infections.

Weakness in oil futures is also realized as several of the roughly 20 refineries in the United States that shut or cut runs leading up to and including the Christmas weekend because of sub-zero temperatures are restarting, while the effects of Winter Storm Elliott continue to disrupt travel during the holiday. Add to this a warming trend across a large swath of the country that could push temperatures in New York City above 60 degrees Fahrenheit early next week to further cut into demand for heating fuels.

Following a brutal winter storm, with some in western New York calling Elliott the storm of the century, "Significant warm anomalies will build across the Southern Plains through the Great Lakes early in the 2-5 day period and will expand through the East by days 3-5. Highs will rise into the 50s along the Northeast urban corridor Friday and this weekend, while readings peaking in the 60s and 70s are likely to occur across the South," forecast DTN meteorologists.

The warming trend is coming at the end of the holiday travel season that runs from Dec. 23 to Jan. 2. And while the extreme weather conditions have abated in most parts of the country, with Oregon, northern California, and northern Nevada the exceptions, flight cancellations continue. FlightAware indicates there are 2,443 cancelled flights within, into, or out of the United States today, down from 2,914 on Wednesday. Most of these cancellations are due to Southwest Airlines, which has sharply reduced new bookings because of internal gridlock within their operations. Over the Christmas weekend, more than 20,000 flights were cancelled.

Several refineries in PADDs 2 and 3 that shut ahead of Christmas Day as sub-freezing conditions locked up machinery and otherwise snarled operations began restart procedures earlier this week. Some refiners might move up maintenance. The first quarter, when demand for gasoline is the weakest, is expected to see a heavy slate of turnaround activity.

The pre-Christmas disruptions in oil production and refinery operations didn't show up in data released late Wednesday by the American Petroleum Institute. API reported a 1.3-million-barrel (bbl) draw from commercial crude inventory during the week ended Dec. 23, a modest 510,000 bbl build in gasoline inventory and an unexpected 388,000 bbl increase in distillate fuel inventory. EIA will release its weekly report at 11 a.m. EST.

Shortly before 8 a.m. EST, NYMEX February West Texas Intermediate futures were down nearly $1 at $78.05 bbl, with the February Brent contract on ICE $0.86 lower at $82.40 ahead of expiration later Thursday. March Brent is trading at a roughly $0.25 discount to the expiring contract.

NYMEX January ULSD futures were $0.0780 lower at $3.2998 gallon, with the February contract trailing January delivery by a little more than $0.06. January RBOB futures were down $0.0244 at $2.3385 gallon, with the February contract trading at $2.3544 gallon. Both January ULSD and RBOB futures expire Friday.

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