DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied in early trading Wednesday, helped by a large drawdown from U.S. commercial crude oil inventories and reports the OPEC+ alliance could decrease oil production in a move that would support oil prices against expected demand losses in Europe and Asian markets.

Conflicting reports surrounding OPEC+'s policy decision on Dec. 4 continue to sway oil prices, with the latest signals indicating the alliance might agree to cut production by 500,000 barrels per day (bpd) to offset demand losses in China and European Union.

Overnight economic data out of China showed industrial and service sectors of the economy slipped into deeper contraction this month, hit by rolling lockdowns and various COVID controls. China's manufacturing PMI dropped to 48 in November from 49.2 reported in the prior month, and services declined to a steeper 46.7, with a reading of 50 separating contraction from expansion. That was the lowest reading since April after both measures remained below the 50-demarcation mark for a second consecutive month. Economists say it is highly unlikely the Chinese economy can stage a meaningful rebound until COVID controls are lifted, which is not seen until spring 2023.

Retail and home sales in China fell sharply this year as consumers pulled back on spending amid COVID uncertainty and lackluster government stimulus. Global demand for Chinese exports also declined compared to previous years as Europe is expected to enter into recession at some point next year, and the U.S. economy is slowing under pressure from rising interest rates.

Against this backdrop, OPEC+ might face a tough decision when it meets Dec. 4 to again cut oil production over the winter months after the alliance surprised markets in October with an agreement to reduce their oil production by 2 million bpd.

Even so, prices have since weakened, with Brent crude falling to an $80.61 barrel (bbl) nearly 11-month low this week as protests in China over COVID policies deteriorated the economic outlook for the world's largest oil importer. Last week, Saudi Energy Minister Prince Abdulaziz bin Salman said OPEC+ was "ready to intervene" with further supply reductions if it was required "to balance supply and demand."

Further supporting the oil complex, the American Petroleum Institute reported late Tuesday domestic crude oil inventories declined by 7.85 million bbl during the week ended Nov. 25, more than three times calls for a 2.1-million-bbl draw. If confirmed by Energy Information Administration data later Wednesday morning, the drawdown would press nationwide oil inventories to 7% below the five-year average.

Crude stocks at the Cushing, Oklahoma, tank farm, the New York Mercantile Exchange delivery point for West Texas Intermediate futures, also decreased 150,000 bbl, while inventory from the Strategic Petroleum Reserve was drawn down 4.1 million bbl. The nearly yearlong sales of SPR oil by the U.S. government aim to boost supplies as to reduce gasoline prices at the pump, but is beginning to wind down.

API also reported gasoline stocks increased 2.85 million bbl last week, well above an anticipated 500,000-bbl build. The trade association said distillate inventories rose 4.01 million bbl through the week ended Nov. 25 versus an expected 200,000-bbl increase.

Near 7:30 a.m. EST, WTI futures for January delivery advanced $1.78 to $79.98 bbl. January Brent futures on ICE rallied $2.06 to $85.09 bbl ahead of expiration Wednesday afternoon, and the February contract expanded its premium against the expiring contract to a $1.03 contango. December RBOB futures on NYMEX edged higher to $2.3560 gallon in its last day of trading, with the January contract at $2.3458 gallon. December ULSD futures added $0.1030 to $3.3989 gallon ahead of expiration, and the next month contract gained to $3.3277, up $0.0838 in early trading.

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