DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced in early trade Friday after the International Energy Agency revised higher its demand forecast for the remainder of the year, citing accelerated gas-to-oil switching for power generation in the European Union, Middle East, and parts of Asia amid inadequate supplies and sky-high gas prices, while economic optimism in the United States tied to strong job growth and cooling inflation in July lent further support for the oil complex.

In its Oil Market Report released Thursday morning, the Paris-based watchdog raised its estimate for 2022 global demand growth by 380,000 barrels per day (bpd) to 2.1 million bpd, seeing total consumption at 99.7 million bpd this year and 101.8 million bpd in 2023.

"With several regions experiencing blazing heatwaves, the latest data confirm increased oil burn in power generation, especially in Europe and the Middle East but also across Asia. Fuel switching is also taking place in European industry, including refining," said IEA.

The trend of gas-to-oil switching may only accelerate should Russia cut its gas deliveries to the European Union this winter, boosting demand for diesel and fuel oil.

On the supply side, the agency estimates global oil production hit a post-pandemic high of 100.5 million bpd in July as maintenance wound down in the North Sea, Canada, and Kazakhstan. Furthermore, Organization of the Petroleum Exporting Countries and Russia-led partners ramped up total oil production by 530,000 bpd last month in line with higher output targets while non-OPEC+ production rose by 870,000 bpd.

The agency also forecast limited declines in Russian production than previously forecasted. While Russia's exports of crude and oil products to Europe, the United States, Japan, and South Korea have fallen by nearly 2.2 million bpd since the start of the war, the rerouting of flows to India, China, Turkey, and others, along with seasonally higher Russian domestic demand has mitigated upstream losses. By July, Russian oil production was only 310,000 bpd below pre-war levels of 10.2 million bpd compared with IEA's earlier expectation for a 3 million bpd drop. Should the European Union go forward with embargo on Russian crude and oil products that comes into full effect in February 2023, some 1 million bpd of products and 1.3 million bpd of crude would have to find new buyers outside of the EU.

In financial markets, the U.S. dollar eroded further in early index trade Thursday after suffering its biggest single-day decline in five months on the back of a softer-than-expected July inflation print. U.S. consumer price index showed no change last month after spiking 1.3% in June, bringing annualized rate of inflation from a 41-year high 9.1% to 8.7%, according to data released Wednesday by the Bureau of Labor Statistics.

A decline in gasoline prices, down 7.7% in July, offset increases in food and shelter costs, leading headline inflation to run at a cooler pace than markets had anticipated. Core prices, which exclude volatile food and energy categories, increased 0.3% from June but are still at a slower pace than 0.7% rise in June from May. Core CPI rose 5.9% in July from a year earlier, the same annual pace as in June.

The better-than-expected inflation data reset investor expectations of how aggressive the Federal Reserve would have to raise interest rates at its Sept. 20-21 meeting. Federal Open Market Committee hiked rates by 75 basis points at two consecutive meetings in June and July but stressed that the size of additional increases would depend on incoming data. FOMC will see one more monthly CPI report before their September meeting.

The CME Group's FedWatch is pricing in a 61.5% chance of a 50-basis point rate hike in September compared with 58% probability before Wednesday's CPI report, which would take its target federal funds rate to between 3% and 3.25%. Most expectations point to a target range between 3.5% and 3.75% by the end of the year.

Near 7:30 a.m. EDT, nearby month delivery West Texas Intermediate advanced $0.62 to $92.55 barrel (bbl), and the ICE Brent contract for October delivery gained $0.62 to $98.02 bbl. NYMEX September RBOB gained 2.33 cents to $3.0939 gallon, while the NYMEX September ULSD contract surged 7.09 cents to $3.4812 gallon.

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