DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange were little changed in early trading Tuesday following modest losses on Monday, and after the International Energy Agency said it expects available oil supply in December to outpace demand, easing tightness in the global oil market.

IEA, in their monthly Oil Market Report released Tuesday morning, said the surge in new COVID cases would slow the recovery in oil demand, namely air travel, prompting the Paris-based analysts to revise lower their expected world oil consumption rate by 100,000 barrels per day (bpd) for both this year and 2022. IEA now projects a 5.4 million bpd annual increase in world oil demand this year and 3.3 million bpd year-on-year growth rate for 2022 when it is seen returning to pre-pandemic levels at 99.5 million bpd.

The energy watchdog added that an upward trend in global oil production begins in December, with increased output gains led by the United States and the Organization of the Petroleum Exporting Countries and their Russian-led allies. IEA projects the United States, Canada, and Brazil to produce oil at their highest annual levels in 2022 that would lift non-OPEC output up 1.8 million bpd year on year. Energy Information Administration shows annual U.S. oil production growth reached a 12.289 million bpd high in 2019, with U.S. output down 1 million bpd from the high in 2020.

If OPEC+ cuts are fully unwound, that would also lift oil output in Saudi Arabia and Russia to record highs, with global oil supply seen up 6.4 million bpd in 2022 following annual growth of 1.5 million bpd this year.

Based on this outlook, world oil supply would outpace demand by 1.7 million bpd in the first quarter 2022, and by 2 million bpd in the second quarter. IEA said the surplus would help replenish countries' depleted stocks, with industry stocks held by countries that are part of the Organization for Economic Cooperation and Development ending October 240 million barrels (bbl) below the five-year average at 2.737 billion bbl. Preliminary data points to a 23 million bbl draw in November following October's 21 million bbl drawdown.

The final meeting of the Federal Open Market Committee in 2021 begins Tuesday, with this month's two-day meeting by central bank officials expected to be consequential amid broad-based inflation pressures. The Federal Reserve is seen sharply quickening the pace of tapering its bond buying activity, with bank officials beginning the tapering in November by reducing the monthly outlay for Treasuries and mortgage-backed securities by $15 billion from $120 billion. The gradual reduction, which would have ended the 2020 program in June 2022, is seen far too slow after the Bureau of Labor Statistics on Friday reported the Consumer Price Index spiked to a 6.8% 39-year high in November.

Banking officials will get another look at how entrenched inflation is becoming this morning when BLS releases the November Producer Price Index, with wholesale prices expected to have increased 9.2% year-on-year last month. Companies are increasingly passing through higher costs to customers.

The market will scrutinize Fed Chairman Jerome Powell's comments on how far he will shift his thinking on inflation, having only discarded the word transitory in explaining inflation on Nov. 30. The expected change in course in monetary policy to contend with unique inflation pressures birthed during the pandemic has brought forward expectations on increases in the federal funds rate, now near zero, from none in 2022 a few months back to at least two.

Later this week other central banks will update their monetary policies, with the European Central Bank on Thursday expected to announce plans on winding down their bond purchases launched in 2020. The Bank of England, which was expected to lift interest rates during their meeting on Thursday, is seen delaying that decision until February 2022 amid a surge in COVID cases through the Omicron variant in the United Kingdom, with Prime Minister Boris Johnson earlier this week reporting the first death in the country from the new variant.

On Friday, the Bank of Japan is expected to maintain its accommodative monetary policy, with Japan not experiencing inflation despite those pressures reverberating globally.

Monetary tightening could slow economic growth next year, with the market set to get a fresh reading from the Federal Reserve Wednesday afternoon when the central bank provides its quarterly economic projections. In September, the Fed projected U.S. gross domestic product to grow annually by 5.9%, down from a 7% expectation in June, and for U.S. GDP to expand 3.8% on an annualized basis in 2022, up from a 3.3% forecast in June.

In early trading, NYMEX West Texas Intermediate for January delivery was up modestly near $71.50 bbl with six trading days left on the board. The February contract is trading at a $0.25 discount to January delivery in the tightly backwardated market.

ICE February Brent futures are trading near $74.60, up about $0.20, with the backwardation in the prompt spread nearly erased. The six-month calendar spread is trading near $1.60 bbl Monday morning, down from a more than eight-year high at $6.11 bbl on Nov. 2, as market tightness abates.

NYMEX January ULSD futures are up about 0.6 cents near $2.2390 gallon, with the January RBOB futures contract fractionally higher near $2.12 gallon.

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