Oil Reverses Higher on Weaker USD, Falling Crude Stocks

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 settled Wednesday's session with gains spurred by a weaker U.S. dollar following a big miss on private employment showing businesses cut the most jobs last month since the start of the pandemic. Also, a decision from OPEC+ producers to continue the gradual unwinding of supply cuts in March despite evidence of a rapidly tightening oil market.

Further supporting the oil complex was the weekly inventory report from U.S. Energy Information Administration released at midmorning showing nationwide crude stockpiles unexpectedly decreased in the final week of January while domestic production dropped to a nearly three-month low 11.5 million barrels per day (bpd). At this rate, U.S. output fell 1.6 million bpd below the pre-pandemic record reached in March 2020. Meanwhile, commercial crude oil inventories currently stand about 9% below the five-year average at 415.1 million barrels (bbl).

Wednesday's inventory report was also supportive for the distillate complex, showing demand for middle distillates climbed above 4.6 million bpd in the final week of January while 12.4% above the five-year average.

Subfreezing temperatures combined with blizzard-like conditions in the U.S. Northeast further bolstered already strong demand for distillates during most of January, with the region's surge in weather-driven demand to spill into next week's report. Another storm, Winter Storm Landon, is now threatening parts of north-central Texas, with the storm to reach New England states later this week, bringing freezing weather including snow and ice to a large swath of the country. FlightAware data shows more than 3,500 domestic flights have been cancelled on Wednesday and Thursday due to the storm.

Winter Storm Landon could adversely affect oil production in Texas and Oklahoma, with the risk of supply disruption in the United States coming at a time when OPEC+ producers failed for three consecutive months to raise production in line with their monthly target of 400,000 bpd. International Energy Agency estimates OPEC+ missed its quota by 800,000 bpd in December after missing November's target by 650,000 bpd and by 730,000 bpd in October. Against this backdrop, the group still agreed Wednesday morning to raise supplies by an expected 400,000 bpd in March, although few analysts now believe this target is achievable.

The argument for OPEC+ ministers to raise production next month above their previously agreed to quotas resonated 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. Of the all-items component of the harmonized consumer goods basket, energy saw the single largest increase with a 28% jump in the 12 months ending in January.

In currency markets, U.S. Dollar Index declined more than 0.40% against a basket of foreign currencies to settle the session at 1-1/2 week low 95.935 following a disappointing reading on U.S. private payroll that showed businesses shed 301,000 jobs in January -- the biggest drop since the start of the pandemic. The pandemic-sensitive leisure and hospitality industry was responsible for more than half of the decline, as companies in the sector reported a 154,000 decline in employment.

Manufacturing also lost 21,000 positions, while education and health services reported a drawdown of 15,000 and construction fell by 10,000.

"The labor market recovery took a step back at the start of 2022 due to the effect of the omicron variant and its significant, though likely temporary, impact to job growth," ADP's Chief Economist Nela Richardson, said.

On the session, March West Texas Intermediate futures settled little changed at $88.26 bbl, and Brent crude for April delivery edged slightly higher to $89.47 bbl. NYMEX March RBOB futures gained more than 3 cents to $2.6070 gallon and March ULSD futures was up 2.77 cents to $2.7689 gallon.

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

Liubov Georges