Oil Futures Mixed as Growing Inventory Implies Weak Demand

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange were higher early Tuesday following a three-day holiday weekend in the United States while the Brent contract on the Intercontinental Exchange softened after Monday's more than $1 advance, with oil futures registering sharp losses last week on building inventory and expected higher interest rates.

West Texas Intermediate futures reversed higher off Friday's $75.06 barrel (bbl) 10-day low ahead of the March contract's expiration at Tuesday's closing bell, with the April contract trading near parity. WTI's market structure has flattened at the front end of the forward curve on building inventory and expectations for increased production in 2023.

During the second week in February, domestic crude inventory spiked more than 16 million bbl to 471.4 million bbl, the highest stock level since June 2021, pushing inventory 33.7 million bbl or 7.7% above the five-year average, according to the Energy Information Administration.

A more than 13-million-bbl revision by the EIA explains the massive size of the weekly build during the week ended Feb. 10, but also indicates the agency has been underreporting the number of available barrels of crude oil. U.S. crude stocks have increased every week in 2023 so far, with inventory building 50.8 million bbl or 12.1% during the first six months of the year.

WTI's flattening forward curve is also realized as U.S. crude production is expected to increase by 490,000 barrels per day (bpd) or 5% this year to 12.49 million bpd, with output in early February at 12.3 million bpd. The Department of Energy announced on Feb. 13 a notice of sale for 26 million bbl of crude oil from the Strategic Petroleum Reserve to meet a congressional mandate, with the oil to be disbursed during the second quarter, pushing more oil into the commercial sector.

Brent crude softened early Tuesday despite better-than-expected economic data showing the European economy is holding up in the face of Europe's largest war since World War II and energy crisis. Manufacturers in the eurozone reported an eighth consecutive month of constrained business activity, although eurozone's services sector did better-than-expected. Eurozone's Purchasing Manager's composite index improved from 50.3 in January to 52.3 in February against consensus for a 50.7 reading, with services jumping 4.3% to 53, well above expectations for a reading of 51. Fifty divides growth from contraction.

"The PMI paints a picture of an economy that is bouncing back from the sluggish performance in recent months, which is mainly driven by fading supply-side problems. This may be giving a larger push to economic activity than initially expected as backlogs of orders are now going into production," said Bert Colijn, senior economist with Dutch international bank ING.

"Demand is positively affected by some returning optimism among consumers over peak inflation being behind us and a recession likely avoided," said Colijn. "But while consumer confidence has been increasing for five months in a row now, it does remain at levels usually associated with recession."

Oil futures had a muted response to Tuesday morning's announcement by Russian President Vladimir Putin that Moscow was suspending participation in the Strategic Arms Reduction Treaty with the United States. The START nuclear arms treaty limited the number of nuclear weapons either country could possess. Putin also said he placed new ground-based strategic nuclear weapons on combat duty, according to Reuters.

Putin's bombast comes ahead of Friday's (2/24) one-year anniversary of Russia's invasion of Ukraine. U.S. President Joe Biden made a surprise visit in Kyiv over the weekend aimed at demonstrating continued support for Ukraine in its war with Russia.

Near 7:30 a.m. EST, NYMEX March WTI futures were up about $0.70 near $77.05 bbl, with the April contract near parity. ICE April Brent futures were down about $0.50 near $83.60 bbl. NYMEX March RBOB futures were more than $0.0325 higher at $2.4415 gallon, and the March ULSD contract was up nearly $0.0370 near $2.7485 gallon, reversing higher from Friday's $2.6577 13-month low on the spot continuous chart. ULSD futures have been under pressure from weak industrial demand.

Brian Milne can be reached at brian.milne@dtn.com

Brian Milne