Oil Futures Wobble After IEA Cuts Demand, Supply Outlook

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Intercontinental Exchange Brent futures swung between modest gains and losses early Thursday after the International Energy Agency sharply reduced its supply outlook through 2023 in response to OPEC+'s decision to cut oil production by 2 million bpd next month, while also cautioning over the pernicious effect of the OPEC+ cuts on global demand growth that is under pressure from high inflation and rising interest rates in major economies.

In its monthly Oil Market Report released this morning, Paris-based energy watchdog warned the decision by OPEC+ to sharply curtail oil production could be a tipping point for the global economy already on the brink of recession.

"The OPEC+ plan to cut oil supplies to the market has derailed growth trajectory through the remainder of this year and next, with the resulting higher price levels exacerbating market volatility and heightening energy security concerns," said IEA.

The agency cut its global production growth to just 170,000 bpd for the fourth quarter -- a large stepdown from a 2.1 million bpd growth rate seen over the third quarter.

Further exacerbating the supply crisis, Russian oil exports could take a big hit in December when an EU embargo on crude oil imports and a ban on maritime services goes into full effect. Russian officials have threatened on multiple occasions to cut oil production in order to offset the negative impact of proposed price caps.

IEA estimates Russian oil exports fell 230,000 bpd in September to 7.5 million bpd, while down 560,000 bpd from pre-war levels. Shipments to the European Union dropped by 390,000 bpd month-on-month.

Domestically, the American Petroleum Institute reported commercial oil inventories increased by a much larger-than-expected margin during the week ended Oct. 7, while also detailing a surprise build in gasoline stocks and larger-than-expected draw in distillate stocks. Further details show crude stocks spiked 7.054 million bbl last week, well above an expected increase of 1 million bbl. Stocks at the Cushing, Oklahoma tank farm, the NYMEX delivery point for West Texas Intermediate futures, fell 750,000 bbl while inventory from the Strategic Petroleum Reserve dropped 7.7 million bbl.

Gasoline stocks rose 2.008 million bbl in the week under review, missing calls for stocks to have fallen 1.2 million bbl. API reported distillate inventories tumbled 4.560 million bbl in the week ended Oct. 7 compared with an expected draw of 1.7 million bbl.

The U.S. Energy Information Administration is scheduled to release its weekly inventory report at 11 AM ET, delayed one day due to Columbus Day holiday on Monday (10/10).

With that in mind, investors now await the release of a key inflation report for the United States scheduled for 8:30 AM ET, with median expectations calling for consumer prices to have increased 0.2% in September, up from 0.1% gain the prior month.

All recent inflation metrics show little progress has been made to curtailing price pressures within the broader economy, suggesting more rate hikes are now on a table for the U.S. Federal Reserve. Cleveland Federal Reserve President Loretta Mester said on Tuesday before a gathering at the Economic Club of New York, that the central bank has a long way to go before inflation will abate despite approving not one but three supersized rate hikes.

Despite some moderation on the demand side of the economy and nascent signs of improvement in supply conditions, core inflation in the U.S., which excludes food and energy, spiked to 0.6% in August, up from 0.4% in the previous month, signaling inflation is becoming more entrenched in the broader economy. What's more worrisome, core producer price index -- a category that excludes food and energy, has also doubled from the prior month to 0.4%. Year-on-year, the PPI is running hot at 8.5%.

Near 7:30 AM ET, NYMEX November WTI futures were up $0.34 to $87.67 bbl, and ICE December Brent futures advanced $0.39 to $92.86 bbl. NYMEX November ULSD futures rallied 7.72 cents to $4.0100 gallon, and the November RBOB contract gained 1.02 cents to $2.6405 gallon.

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

Liubov Georges