Oil Futures Reverse Lower Friday Morning

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearby delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined in early trade Friday on profit taking, with both crude benchmarks retreating from seven-year highs that were spurred on concern over a tightening supply-demand disposition on the global oil market and limited OPEC+ spare capacity after several members of the alliance underproduced their quotas.

Further weighing on the sentiment, U.S. commercial crude oil inventories unexpectedly increased during the week-ended Jan. 14, according to data from the Energy Information Administration, rising for the first time in nearly two months. The 514,000-barrel (bbl) build occurred as domestic refiners pulled back on crude throughputs, processing 120,000 barrels per day (bpd) less crude compared with the prior week.

Gasoline stockpiles, meanwhile, jumped by a hefty 5.9 million bbl last week to 246.6 million bbl, now just 2% below the five-year average. Even though COVID-19 infections are falling across northeastern U.S. states, hospitalizations are still rising nationwide, averaging 156,505 each day -- up 54% from two weeks ago, and the most since the start of the pandemic. Thursday's EIA data suggests, however, that gasoline demand in the United States likely began a tepid recovery, surging 318,000 bpd or 4% last week from an 11-month 7.906 million bpd low reported in the previous week. Although up on the week, demand for the motor gasoline is still down compared to the fourth quarter 2021.

This week, oil traders turned their focus to geopolitics after Yemen's Houthi group attacked the United Arab Emirates -- OPEC's third-largest producer. U.S.-Russia tensions were also in the news as Russia, the world's second-largest oil producer, has built up a large military presence along Ukraine's border and stoked fears of armed conflict.

Analysts suggest there are only three producers within OPEC+ that could increase output today more than before the pandemic hit in March 2020 -- Saudi Arabia, UAE, and Kuwait. Russia may have already hit its production ceiling this month, pumping over 11.17 million bpd in the fourth quarter 2021, according to OPEC's Monthly Oil Market Report. Impaired by a lack of investments into greenfield projects in the Arctic and east Siberia, Russia will likely struggle to raise crude production in line with its agreed OPEC+ quota in coming months. A host of smaller producers from Africa, Central Asia, and Latin America underdelivered against their output targets in the second half of 2021 -- a trend that is unlikely to quickly reverse this year.

The International Energy Agency earlier this week in its Oil Market Report said OPEC+ will have only 2.6 million bpd of additional output 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.

Near 7:30 a.m. ET, West Texas Intermediate March contract fell to $84.40 bbl, down $1.14 from Thursday's settlement, and international crude benchmark Brent for March delivery dropped $1.05 to $87.28 bbl. NYMEX February RBOB futures slumped 2.42 cents to $2.4380 gallon, and the front-month ULSD contract dropped 1.74 cents to $2.6544 gallon.

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

Liubov Georges