DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange powered higher in early trade Friday after International Energy Agency raised concerns over recurring failure of OPEC+ producers to meet production targets that could lead to heightened market volatility in coming months amid rapidly dwindling crude stockpiles and a rebound in jet fuel demand in industrialized nations as pandemic curbs are gradually lifted.

OPEC+ prolonged underperformance has effectively taken 300 million barrels (bbl) or 800,000 barrels per day (bpd) off the market since the start of 2021, according to IEA's Monthly Oil Market Report released this morning. The gap between the group's actual output and its target levels swelled to 900,000 bpd in January, leaving the market vulnerable to supply shocks and geopolitical tensions. As a result, oil inventories held by Organization for Economic Cooperation and Development countries declined by a steep 60 million bbl in December, led by large draws in middle distillates across all regions. At 2.680 billion bbl, industry stocks stand at their lowest level in seven years -- a similar estimate made by U.S. Energy Information Administration and Organization of the Petroleum Exporting Countries this week. Preliminary data for January show OECD industry stocks falling another 13.5 million bbl.

Despite the recurring failure of OPEC+ to meet its targets, the market is still set to shift to surplus in 2022, according to IEA, led by oil production growth outside the bloc. Non-OPEC+ producers could add 2 million bpd of supply this year, and if OPEC+ cuts are fully unwound, the bloc could increase output by 4.3 million bpd. However, that would come at the expense of available spare capacity, which could fall to 2.5 million bpd by the end of the year and end up held almost entirely by Saudi Arabia and the United Arab Emirates. A further 1.3 million bpd of Iranian crude supply could gradually be brought to market should U.S. sanctions be lifted.

In outside markets, U.S. equity futures slumped, and the dollar index strengthened again early Friday after Thursday's shocking inflation print for January showed consumer prices were up sharply for the full slate of everyday household items, including groceries, electricity, vehicles, and shelter. New research from Moody's Analytics showed an average U.S. household is spending an additional $250 a month under 7.5% inflation rate compared to the Federal Reserve's long-run target of 2%. This means consumers in the United States essentially have less discretionary income, which corelates closely with gasoline consumption.

Traders will be closely monitoring incoming demand figures for indications of weakening consumption going into the spring and summer seasons. Breaking down January's consumer price index, energy index gained 0.9% over the month, with an increase in the electricity index being partially offset by declines in the gasoline index and the natural gas index. Energy prices rose 27%, easing from November's peak of 33.3%.

Following the latest inflation data, Goldman Sachs said it was raising its forecast to include "seven consecutive 25 basis points rate hikes," expecting an increase in the federal funds rate to occur at each of the remaining Federal Open Market Committee meetings in 2022. The investment bank had previously predicted five hikes for the year.

Citigroup economists anticipate a more aggressive 50-basis point interest rate hike in March, noting "details of January core CPI point to sustained inflation running around 6% and spreading more broadly, rather than slowing as Fed forecasts have assumed. We now expect Fed to raise rates 50 basis points in March followed by four 25 basis points in May, June, September and December."

Citi previously called for five 25-basis point rate hike in 2022, starting next month.

Against spiking inflation, U.S. President Joe Biden's approval ratings fell below 40%, according to recent polls -- the worst rating of any modern president at the same point in their tenure. When those who disapproved of Biden were asked to name one thing that they approved of during his tenure, 56% or nearly six out of 10 Americans could not come up with an answer.

Near 7:30 a.m. ET, front-month West Texas Intermediate futures rallied $1.21 bbl to above $91 and international crude benchmark for April delivery advanced $1 to $92.47 bbl. NYMEX March RBOB futures moved 1.62 cents higher to $2.6820 gallon, and the front-month ULSD contract rallied to $2.8546 gallon.

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