Oil Futures Retreat From Fresh

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

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled mostly lower, reversing from fresh multi-year highs after U.S. industrial production unexpectedly declined in September while China's economy grew more slowly than anticipated in the third quarter.

U.S. industrial output fell 1.3% in September against expectations for a modest 0.2% gain, while the Federal Reserve in reporting the data also revised August's production number down from a 0.4% increase to 0.1% downtick. Hurricane Ida-caused disruptions, which made landfall Aug. 29 along the Louisiana coastline, were responsible for 0.6% of the September decline, and for 0.3% of the 0.7% falloff in manufacturing activity last month. The continued shortages of semiconductors led to a 7.2% plunge in the production of motor vehicles and parts and caused more than half of the drop off in factory output last month.

The disappointing report from the Federal Reserve followed data released overnight by the National Bureau of Statistics showing industrial output in China slowed well below a 4.5% consensus for September to 3.1%, pressured by an energy supply crunch while China's economy grew 0.3% slower than expected during the third quarter with a 4.9% expansion rate. Weak real estate market saddled with a mountain of debt, COVID-19 mitigation efforts -- with Beijing pursuing a zero-COVID policy, and an energy shortage that have prompted incidents of factory workers working by candlelight, converged to limit growth in the world's second largest economy. In late September, China's Vice Premier Han Zheng, who oversees the country's energy sector and industrial production, directed the country's energy companies to secure enough energy for the winter at all costs.

Oil futures had rallied to fresh highs overnight on tightening global oil supplies following surging electricity and natural gas prices in the European Union and Asia, with coal and gas supplies low in China and India. Department of Energy reported China was the top importer of U.S. liquified natural gas in August with 51.7 billion cubic feet, the most recent data available, while India is seeking expedited LNG deliveries from Qatar, according to Reuters.

In the United Kingdom, small power companies are folding under the strain of record high wholesale gas prices, with gas inventory already low following last winter further depleted during the summer months to address cooling demand because wind generated power fell short. Gas supply is short throughout much of the EU amid the rapid transition away from fossil fuels, namely coal generation. Oil investments have declined for several years, limiting the ability to quickly ramp up output.

Oil demand has also strengthened with global economic growth, with the International Energy Agency forecasting world oil consumption would increase annually by 5.5 million barrels per day (bpd) this year and another 3.3 million bpd in 2022 to 99.6 million bpd, slightly above demand before the pandemic.

The energy shortage in Asia and the EU is expected to worsen during the winter months, especially if the winter is colder-than-usual, prompting gas-to-oil switching that is expected to add 500,000 bpd to more than 1 million bpd of demand for crude oil this winter.

The energy crunch is seen driving oil prices higher during the fourth quarter despite Monday's pullback, with reports indicating the White House has again requested the Organization of the Petroleum Exporting Countries to add more barrels to the global oil market. OPEC, along with Russia-led partners, agreed earlier this month to lift their output by 400,000 bpd in November, maintaining their July agreement of monthly increases of 400,000 bpd through the year as they unwind production cuts put in place in April 2020 in response to the COVID-19 pandemic led crash in world oil demand.

U.S. crude production increased 100,000 bpd to 11.4 million bpd during the first week of October, according to the most recent data available from the Energy Information Administration, with EIA last week projecting U.S. output would average 11.3 million bpd this year. This afternoon, EIA said it expects oil production from the seven key oil producing regions in the United States to increase by 77,000 bpd to 8.219 million bpd from October to November.

NYMEX West Texas Intermediate futures for November delivery edged up $0.16 for an $82.44 per barrel (bbl) settlement ahead of expiration Wednesday afternoon, falling back from an $83.87 high, with the December contract ending at a $0.75 discount to the expiring contract. December Brent futures on ICE recoiled from an $86.04 three-year high on the spot continuous chart, with the previous high reach in October 2018 at $86.74, to settle down $0.53 at $84.33 bbl.

November RBOB futures on NYMEX ended two points higher at $2.4866 to add to its string of consecutive session gains now at eight, paring a rally to $2.5135 gallon. NYMEX November ULSD futures settled down 2.45 cents at $2.5492 gallon after trading as high as $2.6080 gallon.

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

Brian Milne