DTN Oil

WASHINGTON (DTN) -- Following a three-session rally triggered by concerns over OPEC+ spare capacity and rapidly tightening market fundamentals, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined in pre-inventory trade Thursday after the American Petroleum Institute reported U.S. commercial crude supplies unexpectedly increased for the week-ended Jan. 14 along with a larger-than-expected build in domestic gasoline inventories.

Fueling additional volatility for the oil complex could be the looming expiration of the West Texas Intermediate's February contract that rolls off the board this afternoon, with March futures currently trading marginally lower near $85.66 per barrel (bbl). NYMEX WTI March futures expanded its discount against the expiring contract to $0.97 bbl. International crude benchmark Brent for March delivery slipped to $88 bbl, falling $0.40 in overnight trade. NYMEX February RBOB futures were little changed near $2.4553 gallon, and the front-month ULSD contract fell 3.18cts to $2.6605 gallon.

U.S. dollar regained upward momentum against a basket of foreign currencies to trade near 95.6, further pressuring the front-month WTI contract ahead of the release of U.S. inventory report from the Energy Information Administration delayed one day due to Martin Luther King Jr. holiday on Monday.

Figures from the API showed commercial crude oil supplies unexpectedly gained 1.404 million bbl last week versus calls for an 800,000 bbl draw. If realized, the crude build would be the first increase in domestic oi inventories since mid-November. Stocks at the Cushing, Oklahoma hub posted a 1.496 million bbl draw. Gasoline stockpiles rose 3.463 million bbl in the week through Jan. 14, above an estimated 2.1 million bbl increase. API data show distillate inventories fell 1.179 million bbl versus calls for a 700,000 bbl draw. DTN Refined Fuels Demand data show gasoline demand in the United States increased 6.7% in the reviewed week, while demand of diesel fuels surged 16.5%. DTN's RFD data show total U.S. gasoline demand up 7.8% year-on-year for the week but down 2.9% from the same week in 2020. Total U.S. diesel demand was up 5.6% year-on-year for the week and up 6% from the same week in 2020.

WTI and Brent settled at their highest price points in seven years on Wednesday following bullish demand forecast from the International Energy Agency, pointing to rapidly tightening market fundamentals coupled with ongoing concerns over OPEC+ spare capacity. Russia -- the second largest producer within OPEC+, has reportedly struggled to raise crude output in recent weeks. Impaired by a lack of investments into greenfield projects in the Arctic and east Siberia, Russia's crude production will likely flatline through mid-2022, according to analysts. Bank of America commodity research team estimate that Russia has only about 100,000 barrels per day (bpd) of spare capacity left at the beginning of the year, pumping near a record-high 11.17 million bpd.

Arguably, there are only three producers within OPEC+ group that can increase output today more before the pandemic hit in March 2020 -- Saudi Arabia, United Arab Emirates, and Kuwait. The looming question is whether Gulf producers are willing to open their taps more to cool off the rally or to instead allow global crude prices to remain elevated, filling their state coffers more quickly to make up for revenue lost during the height of the pandemic.

IEA estimates OPEC+ will have only 2.6 million bpd of additional output capacity left in the second half of the year should the producer group continue to unwind 2020 supply cuts and Iran remains under sanctions. IEA trimmed its forecast for non-OPEC oil supply by 100,000 bpd to 66.5 million bpd, mostly reflecting constraints on Russian oil production growth.

On the demand side, Paris-based agency revised its 2022 forecast higher by 200,000 bpd to 99.7 million bpd, reflecting a "relatively subdued" impact from the spread of Omicron variant on mobility and economic growth across industrialized nations. Global oil demand is now seen to have risen 5.5 million bpd in 2021 and is expected to grow by 3.3 million bpd this year, the IEA said, surpassing pre-pandemic levels by 200,000 bpd.

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