Oil Futures Sell-Off as China Reaffirms Zero-COVID Policies

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange fell for the second session on Tuesday after China tightened COVID controls in its largest cities as a response to a swelling number of infections, reaffirming its commitment to demand-sapping lockdowns.

West Texas Intermediate and Brent retraced recent gains spurred by speculation Beijing would soon scrap its zero-COVID policies, as health authorities in China face yet another surge in coronavirus infections that spread like wildfire through the nation's largest cities. In Beijing, authorities have closed public schools and tightened requirements for entering the city. Even in places not under immediate lockdowns, the constant COVID testing and stringent travel restrictions are constraining mobility. Oil markets remain sensitive to headlines out of China, the world's top oil importer, which probably lost around 1 million barrels per day (bpd) in fuel consumption due to extended lockdowns.

"Practice has proved that our pandemic prevention and control policy and a series of strategic measures are completely correct, and the most economical and effective," said Hu Xiang, a disease control official, when asked if China would adjust its COVID policies in the near term.

Separately, U.S. Energy Information Administration in its Short-Term Energy Outlook released Tuesday afternoon raised domestic crude oil production this year to 11.83 million bpd, up 20,000 bpd from the previous month's assessment. Next year, U.S. crude production would increase to 12.31 million bpd, matching the prior record high set in 2019, projected EIA.

"Growth in OPEC and non-OPEC oil production -- most notably production in the United States -- keeps the Brent crude oil price in our forecast lower on an annual average basis in 2023 than in 2022, said EIA in its November outlook. "However, we expect the Brent crude oil price will begin rising in 2H23."

For Organization of the Petroleum Exporting Countries, EIA held its production forecast for this year and in 2023 unchanged at 34.09 million bpd and 34.37 million bpd, respectively. The forecast follows a 2 million bpd production cut announced by the cartel in cooperation with Russia-led producers made in early October and took effect this month.

"We expect that Saudi Arabia, Kuwait, and the United Arab Emirates will account for most of OPEC's share of the cut, while the forecast production for other OPEC members remains largely unchanged from our assessment made before the Oct. 5 announcement."

For Russia, EIA expects total liquids production will fall from an average of 10.9 million bpd in the third quarter to 10.8 million bpd during the current fourth quarter, before falling further to an average of 9.3 million bpd for all of 2023.

"This forecast is subject to significant uncertainty around the extent to which upcoming EU sanctions will impact trade flows and the ability for oil suppliers in Russia to find alternative shipping arrangements and buyers," said EIA.

Domestically, U.S. oil inventories are projected to have declined by 200,000 bbl for the week ended Nov. 4, with analysts attributing a small decrease to yet another transfer of crude last week from the nation's Strategic Petroleum Reserve to commercial operations. The yearlong SPR sales strategy by the U.S. government, which aims to boost supplies so as to reduce gasoline prices at the pump, extends through Dec. 31.

Gasoline stockpiles are expected to have decreased by 1.1 million bbl and distillate stocks to have fallen by 900,000 bbl. Refinery use likely increased by 0.5% from the previous week to a 91.1% utilization rate nationally.

In financial markets, U.S. Dollar Index reversed lower in afternoon trading Tuesday, falling 0.4% against a basket of foreign currencies to a 109.542 settlement as traders positioned ahead of the U.S. midterm elections that could see Republicans taking control of both chambers of Congress. The potential for a Republican sweep and a divided U.S. government over the second half of President Joe Biden's term in office, helped the stock market higher, with Dow Jones Industrials surging nearly 350 points and the S&P 500 by 0.55% in late trading.

Polls suggest Republicans will win a majority in the House where all 435 seats are up for a vote Tuesday, 220 of which are currently held by Democrat lawmakers. There's speculation Republicans might pick up as many as three seats in the Senate, with the upper chamber currently evenly split with Vice President Kamala Harris providing the tie breaking vote for Democrats.

At settlement, NYMEX WTI for December delivery fell $2.88 barrel (bbl) to $88.91 bbl, and ICE January Brent fell $2.56 bbl to $95.36 bbl. NYMEX December RBOB futures declined $0.0164 to $2.6367 gallon, and December ULSD futures retreated $0.0104 to $3.7707 gallon.

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

Liubov Georges