Oil Futures Slide to 2-Week Low as Demand Outlook Weakens

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

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the prompt-month Brent contract on the Intercontinental Exchange slid to two-week lows in early trading Monday as global oil demand, already set to weaken seasonally in the first quarter, is seen further restrained amid increased travel restrictions in Europe amid spiking COVID cases.

Most countries in Europe have adopted some form of restriction on travel, from the more extreme state of emergency declared through March 2022 in Bulgaria, to self-quarantine requirements in Italy for unvaccinated travelers in an effort to slow COVID infections. Late last week, France banned nonessential travel to and from Britain, where omicron is now the dominant COVID strain, while in the Netherlands officials reimposed a lockdown that closes through mid-January all nonessential business activity.

Health officials in the United States are raising concerns that the fast-spreading omicron variant will swamp hospitals in coming weeks, but the United States hasn't added new restrictions, although outgoing New York City Mayor Bill de Blasio said his administration is considering changes to the New Year's Eve celebration in Times Square.

The latest concerns over COVID are taking place as air travel in the United States is picking up pace. The Transportation Security Administration reported passenger throughput at TSA checkpoints in U.S. airports topped two million from Dec. 16 through Dec. 18, the most recent data available, albeit down 16% from the comparable period in 2019.

Seasonally, global oil demand is weakest in the first quarter, although the Organization of the Petroleum Exporting Countries earlier this month revised higher its projection for first quarter 2022 demand by 1.11 million barrels per day (bpd) to 99.13 million bpd compared to a fourth quarter estimate of 99.49 million bpd. OPEC said a slowed demand recovery in the fourth quarter would be realized in the first quarter.

On Dec. 14, International Energy Agency said global oil supply would likely outpace demand by 1.7 million bpd in the first quarter 2022, and by 2 million bpd in the second quarter, as supply cuts from OPEC+ continue to unwind. OPEC+ is set to increase production by 400,000 bpd in January, continuing their agreement reached in July to return 400,000 bpd in oil output cut in April 2020 in the depths of the pandemic each month until all cut production is restored. OPEC+, which hasn't officially closed their Dec. 2 meeting, is scheduled to again meet on Jan. 4.

Backwardation in both West Texas Intermediate and Brent's market structure are weakening, with the prompt spreads trading at parity ahead of the January WTI futures contract expiration this afternoon. The weakening backwardation, with the WTI six-month calendar spread down nearly $1 from Friday to $1.30 barrel (bbl) and the Brent six-month forward spread trading near $1.70 bbl, reflect improving supply availability.

In early trading, NYMEX January WTI futures were down more than $3 at $67.75 bbl, with the February contract trading at $67.70 bbl. ICE February Brent futures were $2.70 lower near $70.80 bbl, with the March contract trading at parity. NYMEX January ULSD futures were down more than 8 cents at $2.1370 gallon, with January RBOB futures 6cts lower near $2.0610 gallon.

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

Brian Milne