WTI Falls Below $70 on Weaker Demand Signals, Surplus Outlook

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

WASHINGTON(DTN) -- Front-month New York Mercantile Exchange oil futures and the nearest delivered Brent contract on the Intercontinental Exchange extended losses into a third consecutive session Wednesday, with investors keeping risk appetite in check following the outlook for lower demand growth next year hit by the rapidly spreading omicron variant of coronavirus and a smaller-than-expected draw from the U.S. commercial crude oil stockpiles for the week ended Dec. 10 reported late Tuesday.

Market attention will turn Wednesday afternoon to the highly anticipated decision on monetary policy by the Federal Open Market Committee when central bank officials are expected to announce a sharp acceleration in reducing monthly bond purchases. The Federal Reserve will also release their latest projections for inflation, unemployment rates, and economic growth, while the dot plot will offer banking official views on when the central bank would increase the federal funds rate.

Ahead of the meeting, government data reported U.S. wholesale prices spiked 9.6% in the 12 months ending in November, which was also the highest year-on-year PPI print on record. The consumer price index -- the market's preferred gauge of inflation -- increased 6.8% from a year earlier in November to a 39-year high. With the recent inflation readings, market expectations of changes in Fed policy have changed as well, as reflected in CME Group's Fed Watch tool. The consensus still calls for FOMC officials to leave interest rates unchanged at Wednesday's meeting, but about 30% of investors now see a 50-basis point hike by June 2022. That's up from 0% only a month earlier.

Fed Chairman Jerome Powell is all but certain to announce a pivot to a faster pace of tapering $90 billion in monthly bond purchases, while investors will look for clues from his post meeting news release on when the central bank would hike interest rates in the face of rising inflation.

Wednesday morning, oil futures extended the selloff triggered by downgraded projections on global oil demand growth from the International Energy Agency released Tuesday. The Paris-based energy agency now forecasts demand growth of 5.4 million barrels per day (bpd) for this year and 3.3 million bpd for 2021, down by 100,000 bpd from November's outlook. IEA warned that 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, albeit will not derail it. COVID-19 cases have been rising steadily across most of the nations around the world in recent weeks.

"Omicron is spreading at a rate we have not seen with any previous variant," said World Health Organization Director-General Tedros Adhanom Ghebreyesus. "Even if omicron does cause less severe disease, the sheer number of cases could once again overwhelm unprepared health systems."

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. At the same time, the Energy Information Administration projects global production growth will outpace gains in global oil demand, with supply seen rising by 1.7 million bpd in the first quarter 2022, and by 2 million bpd in the second quarter.

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.

Separately, the American Petroleum Institute reported Tuesday a smaller-than-expected draw from commercial crude oil inventories in the week ended Dec. 10 while gasoline inventories posted a smaller-than-expected increase and distillate inventories fell against estimates for a build. API data show commercial crude oil supplies decreased 815,000 barrels (bbl) in the week profiled compared with calls for 2 million bbl drop. The report shows stocks at the Cushing, Oklahoma hub rose 2.257 million bbl. Gasoline stockpiles added 426,000 bbl in the week ended Dec. 10, missing estimates for a build of 1.2 million bbl. API data show distillate inventories dropped 1.016 million bbl, missing calls for a 100,000 bbl gain.

Markets now await the release of official data from the EIA on tap for a 10:30 a.m. EST release.

Near 7:30 a.m. EST, NYMEX January West Texas Intermediate futures declined $0.79 to $69.96 bbl, with ICE February Brent futures sliding below $73 bbl, down $0.71 bbl in overnight trading. 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 now trading near a $1.50 bbl.

NYMEX January ULSD futures fell 2 cents to $2.1984 gallon, with the January RBOB futures contract falling 1.68 cents to $2.0940 gallon.

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

Brian Milne