Oil Choppy After European Inflation Data Fuel Demand Fears

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange were shallowly mixed early Wednesday after inflation data from the European Union showed the annual rate of consumer prices unexpectedly jumped to the highest on record in January, with runaway energy prices being the largest contributor behind the spike. The data set could arguably prompt Organization of the Petroleum Exporting Countries together with Russia-allied partners that meet Wednesday by videoconference to decide on production targets for March to release more supplies into the tight market to quell the recent rally in the crude complex.

The argument for OPEC+ ministers to raise production next month above their previously agreed 400,000 barrels per day (bpd) resonates even more this morning following a shocking inflation reading in Eurozone, where the consumer price index spiked to 5.1% in January compared with expectations for inflation to have eased towards 4%. European Central Bank forecasted inflation pressures would abate as 2022 progresses amid easing supply chain issues and fading effects of pandemic-era government stimulus, with the fresh data testing the "transitory" narrative.

Domestically, consumer price index ended 2021 at the highest annualized rate in over four decades at 7%, sending shockwaves through markets and central banks. Economists expect inflation accelerated even further last month, likely hitting a 7.3% to 7.4% range.

This leaves U.S. Federal Reserve and OPEC+ in a sticky situation, with both admitting recently that oil prices are simply too high and stand to undermine the economy. Last week, Federal Open Market Committee signaled it was readying the first hike in the federal funds rate in three years as early as March, while not excluding that the central bank could raise interest rates at each of FOMC's consecutive meeting this year. Goldman Sachs expects Federal Reserve would raise interest rates five times this year.

"The producers' group is likely growing more concerned by the hawkish central bank shift that could lead to slower global growth and oil revenues later this year. We view growing potential for a faster ramp-up..., given the pace of the recent rally and the likely pressure from importing nations," Goldman said in a note to clients.

The question remains whether OPEC+ is able to deliver more than 400,000 bpd of new production next month. Key members of the alliance, including Russia, Nigeria, and Kazakhstan, have consistently missed their targets in recent months, reportedly struggling with maintenance and underinvestment. International Energy Agency estimates OPEC+ missed its production quota by 800,000 bpd in December after missing November's target by 650,000 bpd and by 730,000 bpd in October.

Separately, the American Petroleum Institute reported Tuesday afternoon U.S. commercial crude oil supplies dropped 1.645 million barrels (bbl) during the week-ended Jan. 28 versus calls for an increase of 1.1 million bbl. The report shows stocks at the Cushing, Oklahoma, hub down 1.031 million bbl. Gasoline stockpiles surged 5.816 million bbl in the week through Jan. 28 versus an estimated 1.7 million bbl build. API data show distillate inventories dropped 2.508 million bbl versus calls for a 1.6 million bbl draw.

Limiting losses for the oil complex are meteorologist forecasts of yet another major winter storm, Landon, approaching states in the southern United States with heavy snow and subfreezing temperatures that are seen hitting north central Texas by 3 p.m. ET.

DTN Weather expects a much colder airmass will build behind the cold front across the central United States in the next two to five days, with the coldest anomalies targeting southern Plains by days three through five. Dallas area could see temperatures drop to as low as 10 degrees Fahrenheit. Winter storm watches are now covering a wide swath of the United States, from El Paso, Texas, through the Midwest to parts of the northeast, including Burlington, Vermont.

The forecast comes nearly a year after a catastrophic Winter Storm Uri devastated the Texas oil infrastructure and power grid, shuttering gas pipelines and power lines, and disrupting operations at oil, gas, and petrochemical production facilities. Swathes of Texas' pipeline capacity runs overground, and equipment is largely unwinterized to withstand subfreezing temperatures. At its peak, Winter Storm Uri disrupted as much as 1.3 million bpd in Texas daily oil output.

Near 7:30 a.m. ET, front-month West Texas Intermediate futures edged slightly higher to $88.35, with Brent crude for April delivery traded little changed near $89.18 bbl. NYMEX March RBOB futures gained 0.91 cents to $2.5840 gallon and March ULSD futures was up 1.39 cents to $2.7551 gallon.

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

Liubov Georges