DTN Oil

WASHINGTON (DTN) -- With the exception of the February ULSD contract, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the last trading day of January sharply higher, with both the U.S. and international crude benchmarks notching more than 17% monthly gains. The moves came on a laggard return of OPEC+ production joined with the potential threat of supply disruption in key members of the alliance, while global oil demand rebounded faster-than-expected amid a waning surge of omicron infections.

In the United States, the seven-day average of daily COVID-19 infections fell below 500,000 for the first time since Jan. 3 after having peaked above 800,000 midmonth, according to figures from Johns Hopkins University. The omicron surge has been slowing in recent weeks across much of European Union, United States and Latin America, where the nascent virus spread like wildfire just three weeks ago. This time around, the surge is having a more muted impact on oil consumption. Indeed, mobility indicators remain robust and oil demand has proved more resilient than previously expected.

Attesting to this dynamic, International Energy Agency revised up its demand estimates by 200,000 barrels per day (bpd) for both 2021 and 2022. World oil demand is now seen rising by 3.3 million bpd this year, returning to its pre-pandemic levels of 99.7 million bpd.

Faced with resilient demand, global oil production appears to lag those gains, pressured by years of underinvestment and, in some cases, due to potential damage to oil fields that were hastily shuttered in April-May 2020. In December, OPEC+ added just 253,000 bpd to its combined production compared with an agreed to quota for a 400,000 bpd increase.

OPEC's persistent underproduction fuels speculation about the cartel's ability to ramp up output in coming months. Arguably, there are only two members within the group that can pump more today than they could back in March 2020 -- Saudi Arabi and the United Arab Emirates. IEA estimates that OPEC's spare capacity could fall by half to just 2.6 million bpd in the second half of the year.

Traders will next watch for OPEC+ meeting that is scheduled for Wednesday, Feb. 2, with expectations for the group to agree on a 400,000-bpd production increase next month, although few believe now that this target would be actually met.

"The oil market is heading for simultaneously low inventories, low spare capacity and still low investment," Morgan Stanley analysts wrote in a note cited by the Wall Street Journal this weekend, summing up the outlook for the oil market.

On the geopolitical front, UAE said on Monday it intercepted a third missile attack by Iranian-backed Houthis militia in Yemen, which came hours after Israeli President Isaac Herzog landed for his first official visit the Gulf Region. The failed attack follows two other attempts by the Houthis to strike UAE's oil infrastructure earlier this month. On Jan. 17, the rebel group successfully launched an attack on Abu Dhabi National Oil Co. fuel depot in the Mussafah neighborhood of Abu Dhabi that set part of the facility ablaze and killed three people.

The persisting risk of supply disruptions in the Middle East comes as markets are grappling with low petroleum inventories in the United States and other countries that are part of the Organization for Economic Cooperation and Development that have fallen in recent months to well below the five-year average.

On the session, the front-month West Texas Intermediate futures rallied $1.33 to $88.15 per barrel (bbl), having added more than $12 since the start of the year. International benchmark Brent crude for March delivery expired $1.18 higher at $91.21 -- the highest settlement on the spot continuous chart since October 2014. April Brent futures narrowed their discount to $1.95 for a $89.26-per-bbl settlement.

NYMEX RBOB February futures advanced more than 1 cent to expire at $2.5543 per gallon, with March futures finishing the session near parity. An exception to the complex was the ULSD February contract that expired 2.63 cents lower at $2.7592 per gallon, with March ULSD futures having gained a modest 0.33 cent with a $2.7157-per-gallon settlement.

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

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