Oil Sinks on US Crude Stocks Build, China's COVID Controls

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange declined for the third straight session on Wednesday, dragged lower by expected demand losses in China where health officials tightened COVID controls in response to swelling infections and on rising crude oil stocks in the U.S. as the Biden Administration concludes a year-long program of oil sales from strategic reserves.

The U.S. Energy Information Administration's inventory report was mixed-to-bearish for the oil complex, showing commercial oil inventories unexpectedly built last week as domestic producers raised output and refiners boosted run rates to the highest level since August. Further details of the report showed commercial crude oil inventories increased by 3.9 million bbl for the first week of November, contrary to expectations for a 200,000 bbl decrease. Domestic producers, meanwhile, raised crude throughput by 200,000 bpd last week to the highest level since the onset of the pandemic at 12.1 million bpd.

In its Short-Term Energy Outlook released Tuesday afternoon, EIA forecasted U.S. crude production would increase to 12.3 million bpd next year, matching the prior record high set in 2019.

In the refined fuels complex, gasoline stockpiles plunged for the fourth consecutive week through Nov. 4, down by 899,000 bpd to 205.7 million bbl - which is 8% below the five-year average. Demand for motor fuel gained last week by 351,000 bpd to 9.011 million bpd after reaching the highest weekly rate of the year of 9.465 million bpd at the start of October.

Distillate fuel consumption, meanwhile, decreased by 96,000 bpd to 4.161 million bpd last week. Distillate stocks declined 521,000 bbl to 106.3 million bbl, and are now about 24% below the five-year average, the EIA said. At this level, distillate stocks are at their lowest for the end-of-October since 1951. Nationwide distillate inventories have been running consistently below the five-year average for much of the year, with strong exports and domestic demand drawing down stockpiles.

The oil complex once again came under selling pressure from bearish headlines out of China, where authorities in the manufacturing hub of Guangzhou shut down several districts, restricting movement for millions of its residents. The city of 19 million people is the capital of Guangdong province, a major economic powerhouse for China and a global manufacturing hub. Earlier this week, health authorities in Beijing closed some of the public schools and restricted access to the city amid yet another surge in coronavirus infections which have spread like wildfire through the nation's largest cities. 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 bpd in fuel consumption due to extended lockdowns.

The economic impact of COVID controls reared its head into China's inflation data released overnight, showing wholesale prices paid to factories falling by 1.3% in October, down from a rise of 0.9% in September. This marked the first price deflation at China's factories since the beginning of 2020 as zero-COVID weighed on domestic consumption. This rate has been falling every month since hitting 13.5% in October 2021, which was the fastest pace in 26 years, although China's PPI last turned negative in December 2020 when it dropped to minus 0.4% at the outbreak of the COVID-19 pandemic.

China's economy is likely to slow down further in the fourth quarter after experiencing a moderate 3.9% growth reported for the third quarter.

At settlement, NYMEX WTI for December delivery fell more than $3 to $85.83 bbl, and ICE January Brent declined to $92.65 bbl, down $2.71 bbl on the session. NYMEX December RBOB futures declined 9.21 cents to $2.5446 gallon, and December ULSD futures retreated 11.44 cents to $3.6563 gallon.

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

Liubov Georges