Oil Climbs on Weaker USD and Record Demand Growth Forecast

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -– Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange powered higher in early morning Wednesday after the International Energy Agency forecasted global oil demand would rise to a record 101.7 million bpd this year on the back of the re-opening of China's economy, while Russian crude and products exports could slow significantly under pressure from G-7 sanctions that could lead to a tightening global oil market in the second half of 2022.

Nearly half of demand growth this year is expected to come from the Asian region and China in particular, where an abrupt end to zero-COVID policies is seen boosting fuel consumption, said the IEA in its monthly Oil Market Report. The Paris-based energy watchdog lifted its forecast for oil demand growth by nearly 200,000 bpd to 1.9 million bpd after a massive collapse seen in the fourth quarter of 2022. In the final months of 2022, weak industrial activity in OECD coupled with zero-COVID policies in China sliced off nearly 1 million bpd in global demand growth.

"Much of the surplus oil appears to have ended up in emerging markets, including China, and on tankers at sea. Oil on water increased by a massive 181 million barrels because tankers now have to sail significantly longer distances due to the reallocation of Russian flows." commented the IEA.

Global supply-demand balances are set to change in 2023, according to the IEA. Supply growth is expected to slow to 1 million bpd following last year's growth of 4.7 million bpd. An overall non-OPEC+ rise of 1.9 million bpd, led by the United States, will be tempered by an OPEC+ drop of 870,000 bpd due to expected declines in Russian crude output. Russia is likely to remain the wild card for the global oil markets this year.

Russian oil exports initially fell by 200,000 bpd in December to 7.8 million bpd, as the EU waterborne import ban and G-7 price cap came into full effect on December 5, leading Urals' discount to Brent to deepen to $40/bbl. Looking into 2023, product markets, especially diesel, are most at risk just as demand growth recovers for jet fuel consumption.

In financial markets, the U.S. dollar index weakened 0.35% against the basket of foreign currencies to trade near 101.775 after manufacturing data out of New York State showed business activity collapsed this month to the lowest level since June 2020 when the economy was hit with COVID lockdowns. The figure represents the fifth worst reading in the survey's history and was twice as weak as even the most pessimistic estimates.

"New orders and shipments declined substantially. Employment growth stalled, and the average workweek shortened. Looking ahead, firms expect little improvement in business conditions over the next six months," according to comments by the Fed bank.

Taking a broader look, business activity across the U.S. manufacturing sector fell in December for the second straight month, with five out of the six biggest manufacturing industries registering a contraction. By all accounts, domestic manufacturing is already in recession even as the broader economy still hangs on a resilient consumer.

The data doesn't bode well for middle distillate consumption. Distillate fuel oil product supplied to the U.S. market -- a measure of demand -- averaged 3.6 million bpd over the past four weeks, down 5.5% from the same period last year. Traders expect little improvement in the coming weeks.

Near 7.30 AM ET, WTI for February delivery spiked $1.47 to $81.65/bbl, and Brent March futures on ICE advanced $1.25 to $87.17/bbl. NYMEX RBOB February contract rallied $0.0371 to $2.5822 gallon, and front-month ULSD futures advanced $0.0332 to $3.2842 gallon.

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

Liubov Georges