Oil futures rose sharply on Wednesday, with the U.S. benchmark posting its highest finish since late November after government data revealed a sixth consecutive weekly decline in domestic crude supplies, along with a more than 10 million-barrel climb in gasoline inventories. “The draw in crude was a little less than expected, [but] we saw an eye-opening build in gasoline and a very large build” at the Cushing, Okla., delivery hub, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch. “At this time of year, we usually see draws in crude and also builds in the product markets for tax consequence reasons,” he explained. That tax is assessed based on the volume and price of crude-oil inventories, so oil companies look to shed these taxable assets from their books as the year’s end approaches.
The Energy Information Administration on Wednesday reported that U.S. crude inventories fell by 2.1 million barrels for the week ended Dec. 31. That marked a sixth weekly decline in a row. On average, analysts had forecast a fall of 4.4 million barrels, according to a poll conducted by S&P Global Platts. The American Petroleum Institute reported late Tuesday that U.S. crude supplies fell by 6.4 million barrels last week. The EIA, however, also reported weekly inventory increases of 10.1 million barrels for gasoline and 4.4 million barrels for distillates. The numbers were well above the average 1.9 million barrels each for the gasoline and distillate categories forecast by analysts polled by S&P Global Platts.
Oil largely shrugged off the larger-than-expected builds in petroleum product supplies for the week ended Dec. 31 amid a “growing market consensus that the latest wave of COVID and accompanying decline in demand will be short-lived” and growing concerns over OPEC’s ability to delivery on their production goals, said Troy Vincent, senior market analyst at DTN.
West Texas Intermediate crude for February delivery, rose 86 cents, or 1.1%, to settle at $77.85 a barrel on the New York Mercantile Exchange. Prices based on the front month ended off the day’s high of $78.58, but still finished at the highest since Nov. 24, according to Dow Jones Market Data. March Brent crude, the global benchmark, added 80 cents, or 1%, to $80.80 a barrel — the highest settlement since Nov. 25.
“The ongoing theme of subdued U.S. Gulf Coast imports due to ad valorem tax considerations…carried through to the last week of the year, helping to draw down U.S. Gulf Coast inventories by 3.4 million barrels,” said Matt Smith, lead oil analyst, Americas, at Kpler. The market, however, also saw “a massive build to gasoline inventories, as implied demand tanked after the pre-holiday ramp up,” he said in emailed comments.
Crude stocks at the Cushing, Okla., Nymex delivery hub edged up by 2.6 million barrels last week, the EIA reported, though total domestic petroleum production was unchanged at 11.8 million barrels per day. Crude supplies in the U.S. Strategic Petroleum Reserve fell 1.3 million barrels for the week to 593.7 million barrels, according to EIA data. Crude prices had climbed on Tuesday after the Organization of the Petroleum Exporting Countries and its allies — known together as OPEC+ — held to plans to boost output by 400,000 barrels a day in February. “The move from OPEC+ provides some comfort to the market as it signals that they are confident with the demand outlook in the coming months,” said Warren Patterson, head of commodities strategy at ING, in a note.
While oil has bounced back from the sell off sparked by the discovery of the omicron variant of the coronavirus that causes COVID-19 in late November, the market might not be out of the woods, he said. China put a second city — Yuzhou, with a population of 1.1 million — under lockdown after discovering three asymptomatic cases of COVID-19, according to reports. The 13 million residents of Xi’an have been under lockdown restrictions since Dec. 23. “Clearly, China continues to pursue its zero-COVID policy and if we were to see more widespread lockdowns domestically that would be a concern for oil demand,” Patterson said.
Meanwhile, from a seasonal standpoint, “we are in a low demand period coupled with new COVID restrictions being implemented [so] we feel crude could see some weakness in the days and weeks ahead,” said Zahir.
