Oil Futures Fall on Demand Concerns Over Asian COVID Wave

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange ended down for a second session Tuesday amid heightening concern over oil demand as a growing wave of COVID infections in Southeast Asia threaten projected consumption rates for the high growth region, although pared losses on strong economic growth in the United States and Eurozone.

NYMEX September West Texas Intermediate futures settled down $0.70 at $70.56 barrel (bbl), paring a decline to a $69.19 two-week spot low, with the July low at $65.21 bbl. ICE October Brent futures moved off a $71.05 bbl, two-week low on the spot continuous chart to settle down $0.48 at $72.41 bbl, about $5 bbl above the July low of $67.44. Futures declines for products were smaller, with September RBOB down 0.39 cents at $2.2708 gallon at settlement, moving off a nearly two-week spot low at $2.2337 gallon. September ULSD futures settled down 0.94 cents at $2.1264 gallon, cutting a loss to a nearly two-week spot low at $2.0892 gallon.

In China, COVID cases have been confirmed in more than 33 cities in 17 of the country's 33 provinces and regions, according to the Associated Press. Although the number of COVID cases have been limited, Chinese authorities have locked down at least two cities with populations over one million, Zhuzhou in the Hunan province with a population of 1.2 million, and the city of Zhangjiajie where 1.5 million people live. Beijing is not expected to lock down the country, but rather look to contain the spread of the virus with draconian measures at localities and cities.

AP reported Chinese authorities are requiring citywide testing in Wuhan, a city of 11 million and where COVID-19 began in 2019, while canceling all domestic flights in Nanjing and Yangzhou, and long-distance trains from 23 stations.

Chinese authorities indicate 1.6 billion vaccine doses have been administered. Only Chinese vaccines have been provided in China, that have shown to have a lower efficacy than western counterparts.

Similar lockdowns and restrictions have peppered Southeast Asia, including in Malaysia, Thailand, Indonesia, Philippines, and Vietnam, triggering closures or operations well below capacity at factories and ports that further threaten an already strained supply chain as the disruptions feed upon themselves.

Manufacturing activity contracted in July in Indonesia, Malaysia, Thailand and Vietnam, and hovered just above breakeven at 50.3 in China, according to IHS Markit Purchasing Manager's Indices. Readings below 50 indicate contraction.

The Organization of the Petroleum Exporting Countries in their most recent Monthly Oil Market Report released July 15 projected world oil consumption would increase 2.92 million barrels per day (bpd), or 3.1%, to 98.24 million bpd from the second quarter to the third quarter, and by another 1.6% to 99.82 million bpd in the fourth quarter. OPEC expects China to account for 660,000 bpd of the quarterly increase for the third quarter, and by another 120,000 bpd in new demand for the fourth quarter. Oil demand is projected to increase by 390,000 bpd in India during the third quarter, and by another 700,000 bpd from the third quarter to the fourth quarter.

U.S. companies are drawing down inventories to meet explosive demand for consumer goods, as they endure long lead times in securing raw materials and parts. This has affected a host of products, including durable goods, furniture and automobiles, to name a few. The Institute of Supply Management on Monday reported inventories at manufacturing companies fell into contraction in July, down 2.2% to 48.9, while customers' inventories dropped 5.8% last month to 25 -- the lowest reading since the index was established in 1997, with the decline, now trending for 58 months, accelerating. Low customers' stock levels are bullish for ongoing growth.

The surge in demand for goods turbocharged by excessive federal stimulus efforts earlier this year has pushed inflation sharply higher, heightening concern the Federal Reserve would rein in accommodative monetary policy much earlier than anticipated. The U.S. Consumer Price Index rose to a 13-year high in June, up 5.4% against a year ago, well above the 2% target by the Federal Reserve.

Federal Reserve Chair Jerome Powell has said several times the central bank would allow inflation above its 2% target for an extended period of time because of how long it held below the target, although did not define what would prompt a change in the Fed's accommodative monetary policy. Maintaining easy monetary policy now is driven by the central bank's mandate to spur employment growth, with the national unemployment rate rising from a 50-year low 3.5% before the pandemic hit the United States to 5.9% in June, according to the Labor Department.

Fed Governor Christopher Waller on Monday reiterated the belief that the inflation now being experienced in the United States is transitory, owing to pent-up demand and consumers awash in extra savings following generous federal stimulus and aid payments. However, in a CNBC interview, Waller did highlight pricing power now enjoyed by companies for the first time in a decade, with these companies beginning to pass through higher costs for raw material, logistics and labor to consumers. This could make inflation stickier and harder to tamp down while eroding consumer purchasing power. The recent disruptions in Southeast Asia could add to the inflationary pressures.

A survey from the Wall Street Journal, which includes participation by DTN, found market expectations for across-the-board stock drawdowns to have again occurred for a second week through July 30, with commercial crude inventory in the United States seen to have been drawn down 2.7 million bbl. All respondents estimate the crude draw, with Energy Information Administration showing commercial crude stocks at 435.6 million bbl as of July 23, 21.5 million bbl or 4.7% less than the three-year average.

If the survey consensus is realized, gasoline and distillate inventories would have fallen for a third week, with analysts estimating a 1.6 million bbl decline in gasoline stocks took place last week, with inventory last reported by EIA at 234.2 million bbl, 654,000 bbl or 2.3% below the three-year average.

Distillate stocks are expected to have been drawn down 500,000 bbl during the final full week of July, with market consensus spanning a 6.4 million bbl range between estimated builds and draws. EIA reported distillate stocks at 137.9 million bbl on July 30, 8.3 million bbl or 5.7% below the three-year average.

American Petroleum Institute's weekly inventory report is due out at 4:30 p.m. EDT, with the EIA to publish its dataset 10:30 a.m. EDT Wednesday.

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

Brian Milne