Oil Wobbles After IEA Lifts 2022 Demand Outlook, USD Slips

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- In early trading Wednesday, ULSD futures accelerated a sell-off on concern higher interest rates would push the U.S. economy into recession, while West Texas Intermediate on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange softened in pre-inventory trade after the International Energy Agency raised its global demand outlook for the remainder of the year, citing soaring oil use for power generation and gas-to-oil switching across large economies in Asia and the European Union.

In its closely watched monthly Oil Market Report released Wednesday morning, IEA raised its global demand forecast by 380,000 barrels per day (bpd) this year for annualized growth of 2.1 million bpd. World oil demand is now seen at 99.7 million bpd in 2022 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 Asia. Fuel switching is also taking place in European industry, including refining," said IEA.

Relative gains in global oil demand come despite weakness in other areas of the global economy and sharp slowdown in China's fuel consumption where COVID-19 restrictions shaved 400,000 bpd from oil demand this year and 300,000 bpd in 2023. China's oil consumption is still seen recovering to a pre-pandemic high of 16 million bpd next year.

At the same time, the agency estimates Russian oil exports fell by 115,000 bpd in July to 7.4 million bpd and from about 8 million bpd at the start of the year. Russian crude and oil product flows to the United States, United Kingdom, EU, Japan, and Korea have slumped by nearly 2.2 million bpd since the outbreak of the war, two-thirds of which have been rerouted to other markets, notably Asia. Lower exports to G7 economies come ahead of an expected price cap agreement on Russian seaborne crude and petroleum products exports that could further slash Russian oil volumes on the global market.

On the supply side, IEA estimates worldwide oil output reached post-pandemic high of 100.5 million bpd in July as maintenance ended in the North Sea, Canada and Kazakhstan. OPEC+ ramped up total oil production by 530,000 bpd in line with higher targets and non-OPEC+ rose by 870,000 bpd. World oil supply is set to rise by a further 1 million bpd by year-end. In its report, IEA revised its forecast for Russian oil output but have lowered the outlook for North America.

Further weighing on the complex, the American Petroleum Institute reported on Tuesday commercial crude oil inventories in the United States surged 6.035 million barrels (bbl) for the week ended Sept. 9, six times estimates for a 1-million-bbl build. Stocks at the Cushing, Oklahoma, tank farm, the delivery point for WTI futures, also added 101,000 bbl. API reported distillate inventories increased 1.75 million bbl in the week ended Sept. 9, well above calls for an increase of 100,000 bbl. Gasoline stocks, meanwhile, tumbled 3.23 million bbl in the week profiled, more than five times estimates for a 600,000 bbl decrease.

In broader markets, equity futures were mostly unchanged as the U.S. dollar slipped after Tuesday's rebound following a hotter-than-expected inflation report, showing core consumer prices in August pushed higher. Americans are now paying more for almost everything and falling gasoline prices alone cannot ease the pressure from rising costs for clothes, rents and medical services.

"Core inflation is higher this month than for the quarter, higher this quarter than last quarter, higher this half of the year than the previous one, and higher last year than the previous one," tweeted former U.S. Treasury Secretary Lawrence Summers, an outspoken critic of how the Federal Reserve has handled inflation.

The acceleration in inflation strengthens the case for the Federal Reserve to lift the federal funds rate by at least 75 basis points at next week's meeting and raises the prospect of hefty increases continuing in coming months. Fed officials had suggested they were prepared to make their third consecutive 75 basis point increase at the Sept. 20-21 Federal Open Market Committee meeting even if inflation had cooled in August, as many economists had anticipated.

The risk higher interest rates could tip the U.S. economy into recession pressured ULSD futures, which correlates closely with the economy's performance. NYMEX October ULSD futures plummeted 15.83 cents to $3.3848 gallon. Meanwhile, the prospect of a national rail strike that could upend ethanol deliveries underpinned strength in the gasoline contract, with NYMEX October RBOB futures adding 1.56 cents in early trading to $2.4964 gallon. NYMEX WTI for October delivery was flat near $87.35 bbl, and Brent crude on ICE traded little changed near $93.20 bbl.

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

Liubov Georges