DTN Oil

WASHINGTON (DTN) -- Extending gains into the fourth consecutive session, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied again in early trade Thursday on a combination of a weaker U.S. dollar and expectations for global oil demand to recover from the Omicron-led contraction in the second half of the year, while Organization of the Petroleum Exporting Countries together with Russia-led partners are delaying the onset of oversupply.

OPEC+ ministers reaffirmed their agreement this week to raise collective production in measured, incremental steps each month until their historic 9.7 million barrels per day (bpd) in production cuts are returned to the global market. Traders, meanwhile, question the ability of OPEC+ to raise production in line with their accord as several members of the coalition consistently underproduced their quotas in recent months. Africa's two largest producers, Nigeria and Angola, missed their targets last month to a tune of 250,000 bpd -- a trend that is believed will continue this year. Furthermore, Libya's crude production declined sharply at the start of a new year, with over 300,000 bpd from the country's largest oil field at Sharara shut-in by an insurgency and another 200,000-bpd shut-in over the weekend due to a leaking pipeline that carries crude to the nation's crude oil terminal El Sider. Combined, these closures have reduced Libyan oil production to about 700,000 bpd -- the lowest in more than a year.

Oil futures found some support on Wednesday following the inventory report from the U.S. Energy Information Administration showing a 2.1 million barrels (bbl) drawdown from commercial crude oil inventories and higher demand from domestic refiners. At 417.9 million bbl, domestic crude oil inventories currently stand about 8% below the five-year average.

The report, however, was bearish for the refined fuels complex, heightening concern over Omicron-led demand destruction. Gasoline consumption slumped 1.5 million bpd or 9.8% from the previous week to 8.172 million bpd -- the lowest since the final week of February 2021. EIA figures were directionally in line with DTN Refined Fuels Demand data that found a 18.4% decline in gasoline use during the final week of 2021. The fresh data might suggest that some Americans have begun to pullback on driving amid a fourth wave of the pandemic that is being led by a highly contagious Omicron variant of coronavirus. Gasoline stockpiles climbed by a massive 10.1 million bbl to 232.8 million bbl compared with analyst expectations for inventories to have increased by just 1.1 million bbl.

Demand for middle distillates also contracted by a sharp 373,000 bpd to 3.739 million bpd, according to the EIA report. Distillate stocks rose by 4.4 million bbl to 126.8 million bbl and are now about 16% below the five-year average.

In outside markets, U.S. equities nudged higher in early trade Wednesday a day after minutes from the Federal Reserve's December meeting revealed the central bank is getting ready to remove its fiscal stimulus more quickly than anticipated.

"Inflation readings had been higher and were more persistent and widespread than previously anticipated," the minutes said. "Some participants noted that ... the percentage of product categories with substantial price increases continued to climb."

The Fed said last month that it would reduce the monthly bond purchases it has made since the spring of 2020 which are intended to lower long-term rates at twice the pace it had previously set and will likely end those purchases in March. That accelerated timetable puts the Fed on a path to start hiking its benchmark short-term interest rate as early as the first half of next year. Fed policymakers also suggested they could hike short-term benchmark interest rate three times this year. That signaled a significant pickup from their September meeting when the 18 policymakers split over whether to lift rates even one time in 2022. Faster-than-expected increase in interest rates joined with slowing corporate earnings could undermine already fragile economic recovery hammered by COVID-19 variants and potential retreat of consumer spending.

Near 8:30 a.m. ET, front-month West Texas Intermediate futures rallied $1.43 to $79.21 bbl -- a fresh 6-1/2 week high. International crude benchmark Brent for March delivery advanced $1.17 to $81.96 bbl. NYMEX February RBOB futures surged 1.67 cents to $2.3102 gallon, with the front-month ULSD contract gaining to $2.4771 gallon, up 3.24 cents.

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