DTN Oil

CRANBURY, N.J. (DTN) -- Front-month New York Mercantile Exchange oil futures and the nearest delivered Brent contract on the Intercontinental Exchange registered modest losses for a second trading session Tuesday ahead of weekly industry inventory data and Wednesday's monetary policy announcement from the Federal Reserve following the International Energy Agency's outlook Tuesday morning that global oil production would outpace demand through the middle of 2022, with that trend beginning in December.

In their monthly Oil Market Report released Tuesday morning, IEA said it revised lower expected global oil demand for both 2021 and 2022 by 100,000 barrels per day (bpd) from its November projection, pointing to the most recent spike in COVID-19 cases and the omicron variant that have prompted a number of governments to revive travel restriction policies that would slow the recovery in jet fuel demand.

In the United States, AAA estimates more than 109 million people will travel 50 miles or more during the holidays between Dec. 23 and Jan. 2, a 27.7 million or 34% increase from year ago. The growing number of travelers are more comfortable as increased number of citizens are vaccinated said the travel club, with the number of travelers flying estimated at 6.4 million up 184% from last year. The first vaccination in the United States for COVID-19 was administered on Dec. 15, 2020. If AAA's estimates are realized, end-year holiday travel would equal about 92% of the number of travelers during the holiday season in 2019.

In its outlook, IEA pointed to growing oil production during the fourth quarter and through 2022 led by the United States and the Organization of the Petroleum Exporting Countries and their Russian-led allies, with the latter unwinding production cuts put in place during the second quarter 2020 as the COVID pandemic struck at a 400,000-bpd monthly clip. IEA projects record annual oil production highs for the United States, Canada, and Brazil in 2022, and by Saudi Arabia and Russia should OPEC+ fully unwind their restrained output.

Analysts at the Paris-based agency project the global oil supply-demand disposition will shift this month to greater production, with supply seen outpacing demand by 1.7 million bpd in the first quarter 2022, and by 2 million bpd in the second quarter.

As central bank officials began their two-day Federal Open Market Committee meeting today, they were greeted with new data showing growing inflation. The Bureau of Labor Statistics this morning reported wholesale prices up a more-than-expected 9.6% in November, increasing 0.8% on a month-to-month basis, an acceleration from the previous three months when the Producer Price Index for final demand was gaining 0.6% each month.

Wholesalers are increasingly passing through higher operating costs such as raw materials, logistics, energy, and labor, and are expected to continue the trend in 2022, which was reflected in November's Consumer Price Index that surged above expectations to a 6.8% 39-year high from a year ago. Heightening inflation pressures have prompted calls from the industry that the Federal Reserve, which consistently stated the inflation being experienced was due to the pandemic and transitory, is behind the inflation curve, with higher inflation eroding purchasing power.

"The characterization of inflation as transitory is probably the worst call in the history of the Federal Reserve, and it results in a high probability of a policy mistake," said Mohamed El-Erian, chief economic advisor for Allianz, and president of Queens College, on Sunday on CBS' "Face the Nation."

The Fed, which began tapering $120 billion in monthly purchases of Treasuries and mortgage-backed securities by $15 billion a month in November, is expected to announce Wednesday afternoon a much quicker pace in retiring the federal outlay. Up from none a few months ago, the central bank is expected to hike the federal funds rate now near zero two times in 2022, and as many as seven times from 2022 through 2024.

NYMEX January West Texas Intermediate futures settled down $0.56 at $70.73 per barrel (bbl), paring a decline below $70 for the first time in a week, with the prompt spread ending at a tight $0.21 bbl ahead of the January contract's expiration on Dec. 20.

ICE February Brent futures settled down $0.69 at $73.70 bbl, with the backwardation in the prompt spread narrowing to $0.07. Increasing global oil supply continues to unwind the bullish market structure, with the six-month calendar spread that reached a more than eight-year high at $6.11 bbl on Nov. 2, settling at $1.54 bbl.

NYMEX January ULSD futures settled down 1.44 cents at $2.2184 gallon, with the January RBOB futures contract 0.57 cents lower with a $2.1108 gallon settlement.

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