DTN Oil

WASHINGTON (DTN) -- Nearby delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange extended their recent rally into afternoon trade Wednesday, lifting both crude benchmarks to fresh seven-year highs propelled by expectations for stronger demand growth this year amid a muted impact from the omicron surge of infections and concerns over OPEC+ spare capacity as several members of the producer alliance appear to be reaching their respective production ceilings months ahead of schedule.

Arguably, there are only three producers within OPEC+ group that could increase output today more than they could before the pandemic hit in March 2020 -- Saudi Arabia, United Arab Emirates and Kuwait. Analysis suggests Russia -- the second largest producer within OPEC+ -- is closing in on its maximum output capacity, pumping over 11.17 million barrels per day (bpd) in the fourth quarter 2021, according to OPEC's Monthly Oil Market Report. Impaired by a lack of investments into greenfield projects in the Arctic and east Siberia, Russia will likely struggle to raise crude production in line with its agreed OPEC+ quota in coming months. A host of smaller producers from Africa, Central Asia and Latin America have begun to underdeliver on their output targets in the second half of 2021 -- a trend that is unlikely to reverse quickly this year. The looming question is whether Saudi Arabia, Kuwait and the UAE are willing to open their taps more to cool off the rally or to instead allow global crude prices to remain elevated, which would allow them to capture more revenue, filling their state coffers more quickly to make up for revenue lost during the height of the pandemic.

The International Energy Agency said Wednesday morning in its Oil Market Report that OPEC+ will have only 2.6 million bpd of additional output left in the second half of the year should the producer group continue to unwind 2020 supply cuts and Iran remains under sanctions. IEA trimmed its forecast for non-OPEC oil supply by 100,000 bpd to 66.5 million bpd, mostly reflecting constraints on Russian oil production growth.

On the demand side, the Paris-based agency revised its 2022 forecast higher by 200,000 bpd to 99.7 million bpd, reflecting a "relatively subdued" impact from the spread of omicron variant on mobility and economic growth across industrialized nations. Global oil demand is now seen to have risen 5.5 million bpd in 2021 and is expected to grow by 3.3 million bpd this year, the IEA said, surpassing pre-pandemic levels by more than 150,000 bpd.

"If demand continues to grow strongly or supply disappoints, the low level of stocks and shrinking spare capacity mean that oil markets could be in for another volatile year in 2022," IEA said.

Separately, U.S. commercial crude oil stockpiles are projected to have fallen by 800,000 barrels (bbl) during the week ended Jan. 14, with forecasts ranging from a decrease of 3.3 million bbl to an increase of 3 million bbl. If realized, the decline would mark the eighth consecutive weekly drawdown from domestic crude supplies. Currently, domestic crude oil inventories stand at 413.3 million bbl, about 8% below the five-year average.

Gasoline inventories are expected to have risen 2.1 million bbl from the previous week, with estimates ranging from a decrease of 2.4 million bbl to an increase of 4 million bbl. Stocks of distillates are expected to have decreased by 700,000 bbl from the previous week.

Refinery run rate likely fell by 0.2% from the previous week to 88.2% of capacity.

The closely watched inventory report from the American Petroleum Institute is scheduled for 4:30 p.m. EST release, delayed one day due to Monday's Martin Luther King Jr. holiday.

DTN Refined Fuels Demand data show gasoline demand in the United States increased 6.7% in the reviewed week, while demand of diesel fuels surged 16.5%. DTN's RFD data show total U.S. gasoline demand up 7.8% year-on-year for the week but down 2.9% from the same week in 2020. Total U.S. diesel demand was up 5.6% year-on-year for the week and up 6% from the same week in 2020.

On the session, West Texas Intermediate futures for February delivery advanced $1.53 to $86.96 bbl, with the next-month March contract widening its discount to $1.16 bbl. International crude benchmark Brent March futures rallied to $88.44 bbl, adding $0.93 on the session. NYMEX February RBOB futures advanced 2.52 cents to $2.4570 gallon, and the front-month ULSD contract gained 1.83 cents to $2.6923 gallon.

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