Oil Rallies on US Economic Data, Russian Oil Sanctions

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 advanced more than 1% early Friday, lifting the international crude benchmark above $88/bbl as investors assessed the impact of Western sanctions on Russian refined product exports, while an improved macroeconomic outlook in the U.S. further added to bullish sentiment.

The EU embargo on Russian gasoline and diesel exports, set to come into effect on February 5, will likely slice off at least 1 million barrels from daily crude output in Russia, according to UBS. The Swiss bank expects Russian oil output to fall below 9 million bpd in 2023 from around 10 million bpd last year. The U.S. Energy Information Administration estimates the impact of Western sanctions might be even deeper, with Russian daily crude output forecast to average 8.5 million bbls this year. Moscow admitted in recent days that Western sanctions will likely reduce its refinery operations but free up more crude oil to sell.

The European Union is a major consumer of Russian diesel, importing on average 1.7 million barrels of middle distillates each day. At the start of 2023, Europe continued to source more than a quarter of its diesel imports from Russia, according to tanker-tracking data.

Finding a replacement for those volumes would be a serious challenge according to even the most optimistic forecasts.

On the economic calendar, the U.S. Personal Consumption Index –- the Fed's preferred metric of consumer inflation -- and consumer sentiment data for late January are due this morning. December PCE is expected to show further deceleration in prices paid by consumers for goods and services, with personal consumption expenditures seen falling into negative 0.1% last month compared to a 0.1% gain reported in November. The Personal Income Index, which represents the income that households receive from all sources including wages and salaries, is likely to fall to 0.2% from 0.4% reported in November. There could be an upside surprise to these data after U.S. gross domestic product report showed personal income for American households actually increased in the fourth quarter compared with the three months ending in September. The gain primarily reflected increases in compensation led by private wages and salaries, government social benefits, and personal interest income. This could be supportive to consumer discretionary spending this year should the unemployment rate remain near historically low levels.

In the labor market, weekly unemployment claims dropped again last week, suggesting the demand for labor is still plentiful even as some large employers announce job cuts.

Initial jobless claims, a proxy for layoffs, fell by 6,000 to 186,000 last week, with several large states, including California, Texas, New York and Michigan reporting large declines in jobless applications. There were 10.5 million job openings in November, down from the peak of 11.9 million in March, but far exceeding the number of unemployed Americans seeking work, a mismatch that continues to fuel competition for workers. By some estimates, the U.S. economy creates four more jobs for a single layoff.

"We're making more jobs than we have new entrants or re-entrants coming in willing to take them," Federal Reserve Bank of San Francisco President Mary Daly said in an interview earlier this month. "So we're still out of balance, but it is slowing."

Also on Friday, investors will get a glimpse into how Americans feel about the economy with the latest reading on consumer sentiment for late January. The University of Michigan Consumer Sentiment Index is expected to show an unchanged reading of 64.6 from the mid-month flash which is still 5 points above the December level.

Near 7.30 AM ET, WTI futures for March delivery advanced to $82.15/bbl, up by $1.16 in overnight trade, and Brent March futures on ICE rallied $1.10 to $88.57/bbl. NYMEX RBOB February contract advanced to $2.6347 a gallon, and front-month ULSD futures gained 2.3cts to $3.4195 a gallon.

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

Liubov Georges