DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange fell more than 2% on Friday, although all petroleum contracts moved off intrasession lows after U.S. Department of Energy announced it would start repurchasing crude oil for the Strategic Petroleum Reserve to replenish emergency stockpiles after a yearlong sales program aimed at stabilizing oil prices.

"This repurchase is an opportunity to secure a good deal for American taxpayers by repurchasing oil at a lower price than the $96 per barrel average price it was sold for, as well as to strengthen energy security," said DOE in a statement released Friday.

The initial buy-back would begin with a bid for 3 million bbl to be delivered in February to the SPR storage facility in Beaumont, Texas, with no decision yet announced for additional purchases.

In October, the Biden administration announced a plan to replenish the SPR using fixed-price forward purchases of crude oil compared to conventional contracts that DOE said exposes producers to volatile crude prices. The program intends to repurchase crude oil for the SPR when the price of West Texas Intermediate is at or below about $67 to $72 bbl. Initial repurchases were intended for delivery in 2024 or 2025.

President Joe Biden in March approved emergency sales from the SPR of 180 million bbl of crude after Russia's invasion of Ukraine led to the price of global benchmark Brent to jump above $130 bbl. DOE said it sold that oil for an average of $96.25 bbl.

In reaction to the announcement, West Texas Intermediate for January delivery trimmed earlier losses to settle the session at $74.29 bbl, down $1.82 bbl, and international crude benchmark February Brent fell $1.49 bbl for a $79.04 bbl settlement. NYMEX January RBOB futures declined $0.0345 to $2.1323 gallon and January ULSD futures nosedived $0.1635 to a $3.1199 gallon settlement.

Underlying Friday's lower settlements are reports of a steep economic contraction in China after an unprecedented wave of COVID cases pushed its healthcare system to the brink of collapse. Authorities are actively discouraging people from seeking help at a hospital. This has led to panic buying from everyday painkillers to simple grocery items as citizens are resorting to at-home medications. Anecdotal reports show megacities like Beijing and Hong Kong have turned into ghost towns as most residents fell sick or are simply scared to catch the virus.

On Dec. 7, authorities in Beijing suddenly lifted all COVID controls in favor of a "let it rip" approach, surprising traders and experts alike. Some studies suggest nearly one million people will die in the coming months because of Beijing's sharp policy U-turn.

In the immediate term, the surge in COVID cases will likely lead to a bumpy reopening for China's economy, now mired with a "stop and go" approach the West faced a year ago when Omicron cases surged before eventually leveling off in the spring. As a result, China's economic activity in the first quarter of 2023 is likely to be underwhelming.

China is the world's second-largest oil consumer, importing on average 10.1 million bpd in the year prior to the outbreak of the COVID-19 pandemic. Analysts estimate that China's demand is lagging somewhere between 700,0000 bpd and 1 million bpd below its pre-pandemic norms.

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