Oil Edges Higher on Bullish EIA Data, Fed's Hawkish Pivot

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Chasing equity markets higher, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange edged higher in market-on-close trade Wednesday. Gains accelerated post-settlement after the Federal Open Market Committee signaled the end of its ultra-easy monetary policy earlier than previously thought, making an aggressive policy change in response to rising inflation.

Furthermore, a bullish inventory report released midmorning from the U.S. Energy Information Administration that has showed a sharp decline in U.S. petroleum stockpiles offered additional support.

At settlement, NYMEX January West Texas Intermediate futures gained $0.14 to $70.87 per barrel (bbl), with ICE February Brent futures edging higher to $73.88 per bbl, up $0.18 per bbl on the session. NYMEX January ULSD futures gained 0.20 cent to settle at $2.2204 per gallon, with the January RBOB futures contract surging 1.67 cents to $2.1275 per gallon.

FOMC concluded their final meeting of the year with a clear signal to the markets that the central bank is prepared to raise its short-term benchmark interest rate at least three times next year to cool higher inflation. The change in policy follows data from November showing the consumer price index spiked to 6.8% over the 12-month period, a 39-year high, while wholesale prices posted its highest year-on-year gain on record at 9.6%. Faced with eyepopping inflation data, the Fed will be buying $60 billion of bonds each month starting in January, half the level prior to the November taper and $30 billion less than it had been buying in December.

Most Federal Reserve officials now expect U.S. gross domestic product annualized growth at 4% next year, down 1.5% from their September projection, while also seeing lower unemployment rate of 3.5% and a higher federal reserve funds rate of 0.9%, up 0.8% from three months ago. Core inflation is now seen at 2.6% for 2020, down from 4.4% expected in October.

EIA's inventory report proved bullish for the oil complex, detailing a larger-than-expected drawdown from U.S. crude oil stockpiles accompanied by a surprise drop in refined fuels supplies. Total petroleum stockpiles declined 15.9 million bbl in the reviewed week, with 4.6 million bbl of that drop realized in crude stockpiles alone. At 428.3 million bbl, commercial crude oil inventories remain about 7% below the five-year average.

Further bullish parts of the report could be found in refined fuel complex. Gasoline stockpiles unexpectedly fell by 719,000 bbl from the previous week to 218.6 million bbl compared with analyst expectations for inventories to increase by 1.2 million bbl. Demand for motor gasoline, meanwhile, shot up by 509,000 barrels per day (bpd) or 5.6% to 9.472 million bpd -- the highest since the week ended Oct. 29.

Distillate inventories also decreased, down 2.9 million bbl to 123.8 million bbl, and are now about 9% below the five-year average, the EIA said. Distillate fuels supplied to the U.S. market spiked 1.318 million bpd or 36% from the prior week to 4.896 million bpd. That's the greatest weekly implied demand rate since late January 2003 when it was 4.926 million bpd, while total oil products supplied to U.S. market reached a record high of 23.191 million bpd last week.

Offsetting some of the bullish effect from EIA's inventory report was concern over COVID, with the World Health Organization on Tuesday warning the new omicron variant of coronavirus is spreading faster than any previous strain and is likely already in most countries of the world. The United Kingdom on Wednesday reported its highest number of daily cases since the pandemic began. Domestically, New York reimposed its indoor mask mandate as COVID-19 cases spiked statewide more than 43% since Thanksgiving, straining the health care system amid staffing shortages.

Citing the spread of COVID-19 strain, International Energy Agency on Tuesday lowered its global oil demand forecast by 100,000 barrels per day (bpd) for both 2021 and 2022, projecting an annual increase of 5.4 million bpd this year and 3.3 million bpd for 2022. IEA warned new containment measures put in place to slow the winter surge of COVID-19 cases will slow the expected recovery in global jet fuel demand, although won't derail it.

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

Liubov Georges