DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange dropped more than 3% on Wednesday, with the front-month West Texas Intermediate settling at a three-week low after data from the U.S. Energy Information Administration showed nationwide crude oil inventories increased more-than-expected during the final week of October and domestic oil production jumped to a fresh 18-month high, while Organization of the Petroleum Exporting Countries and Russia-led partners prepare to further lift production caps for December.

OPEC+ will begin its highly anticipated meeting on Thursday, with traders widely expecting the coalition of 23-producers to increase output by 400,000 barrels per day (bpd) next month, roughly the same amount the group added in October and November. The demand outlook, however, has deteriorated in recent weeks amid ongoing COVID-19 outbreaks in China and Russia coupled with sharp economic slowdown in oil consuming hegemon--the United States. Ahead of the ministerial meeting, the OPEC+ technical panel revised lower their expectations for how tight the global oil market will be in the fourth quarter, with the global supply deficit now seen at just 300,000 bpd in the three months ending in December. That's much smaller than the 1.1 million bpd shortfall previously projected.

OPEC's President Diamantino Azevedo said he sees "no need to deviate" from the current plan as the market is projected to be in balance by the end of the year. He added the group accepts that uncertainties over COVID-19 variants continue to cloud demand forecasts, while he dismissed calls for a bigger hike, saying the recent price increases have been driven by "shortages in coal and gas but not by a shortage of oil." This sentiment has been echoed by oil ministers of Saudi Arabia, Iraq, and Kuwait.

The oil complex came under additional selling pressure mid-morning Wednesday after EIA's inventory report showed domestic crude oil inventories spiked 3.3 million barrels (bbl) last week, more than twice calls for stockpiles to increase 1.5 million bbl. Oil stored at the Cushing, Oklahoma hub, the delivery point for WTI, fell by 916,000 bbl -- a marked slowdown from EIA's reported 3.9 million bbl drop the previous week--suggesting the pace of Cushing drawdowns has begun to ease. Gasoline inventories, meanwhile, declined 1.5 million bbl from the previous week to 214.3 million bbl, slightly above calls for a 1.3 million bbl drop. Demand for motor gasoline rose 181,000 bpd to 9.504 million bpd. Distillate stocks unexpectedly surged 2.2 million bbl to 127.1 million bbl and are now about 5% below the five-year average. Analysts expected a 1.2 million bbl decline.

Demand for distillates weakened for a second week in a row though Oct. 29, falling by 183,000 bpd to 3.686 million bpd. DTN refined fuels data show diesel consumption slipped 1.6% in the reviewed week, while remaining 4.4% higher relative to the same week in 2019. Diesel demand is just a few weeks away from its fourth quarter seasonal peak.

Separately, the U.S. Federal Reserve announced Wednesday it will begin reducing the pace of its $120 billion in monthly bond purchases "later this month", in a first step towards pulling back on the massive amount of fiscal stimulus it had provided to support the economy. The process will see reductions of $15 billion each month -- $10 billion in Treasuries and $5 billion in mortgage-backed securities. That pace would wrap the process up by around mid-2022. At that time, some analysts suggest the central bank will have to introduce its first interest rate hike after holding it near zero since March 2020.

The committee said the move came "in light of the substantial further progress the economy has made toward the Committee's goals of maximum employment and price stability since last December."

On the session, NYMEX WTI for December delivery plummeted $3.05 to $80.86 bbl, and the ICE January Brent contract declined $2.73 to settle at $81.99 bbl. NYMEX RBOB December futures fell 11.16 cents to $2.3385 gallon and NYMEX ULSD December futures dropped 7.37 cents to $2.4345 gallon.

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