Oil futures declined on Friday, with U.S. prices poised to erase much of their gains for the week, after U.S. government data reveal an unexpected weekly rise in domestic crude supplies.
A resurgence of COVID-19 infections in China and Southeast Asia also raised concerns about near-term oil demand.
The Energy Information Administration reported Friday that U.S. crude inventories rose by 4.4 million barrels for the week ended Jan. 15.
The data, which were delayed by two days because of Monday’s Martin Luther King, Jr. holiday and Wednesday’s U.S. presidential inauguration, defied expectations for an average decline of 2.5 million barrels forecast by analysts polled by S&P Global Platts. The American Petroleum Institute on Wednesday reported a 2.6 million-barrel increase.
The EIA data, however, also showed crude stocks at the Cushing, Okla., storage hub declined by 4.7 million barrels for the week.
The increase in domestic crude supplies was a surprise, but the decline in stocks at Cushing, which was “quite large,” wasn’t, as the price curve for U.S. oil futures has gone into backwardation, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch. Backwardation refers to a situation where prices for oil for delivery in the near future are higher than those for later deliveries.
When the forward curve goes into backwardation, “it is not profitable to store crude oil,” he said, so it is “not a surprise to see a large draw in Cushing.”
Zahir attributed the backwardation to Saudi Arabia’s unexpected cut in production. Earlier this month, the Saudis said they would cut more output, starting in February, to offset higher production from Russia and Kazakhstan.
“We surmise between $4 and $5 has been added to the price of crude since this announcement came out,” Zahir said. Combined with recent weakness in the U.S. dollar, that provided a tailwind for crude oil, he added.
“We feel crude will continue to be quite volatile but remain somewhat supported “as long as Saudi implements the cut, and if the U.S. dollar stays weak,” said Zahir. However, if the COVID-19 vaccine rollout continues to be problematic, “we could see [oil] demand get hit even further.”
On Friday, West Texas Intermediate crude for March delivery CL. 1 CLH21 fell by 61 cents, or 1.2%, to $52.52 a barrel on the New York Mercantile Exchange. Prices, based on the front-month settlement a week ago, traded up by 0.2% for the week.
COVID-19 cases have reappeared in China with 103 new infections, marking an 11th day with more than 100 confirmed infections and forcing a lockdown for the first time in months. Meanwhile, Hong Kong on Friday announced its first lockdown, a move reminiscent of the measures used to combat the outbreak of SARs 20 years ago.
Concerns about fresh outbreaks in the region are amplified since it comes just ahead of Lunar New Year festivities, a popular holiday in Asia.
“A rise in Chinese infection numbers is of particular concern, not only because China is among the world’s largest oil consumers and the market that helped oil prices recover the most, but also as the Lunar New Year holiday period is approaching,” wrote Louise Dickson, oil markets analyst at Rystad Energy in a daily note.
“The holiday is traditionally a time of heavy road fuel consumption in China but the country is now introducing restrictions and is advising people to not travel, which will definitely be a slap to oil demand,” the analyst noted.
On top of concerns around Asia, the European Central Bank on Thursday warned that the eurozone could be headed for a double-dip recession if lockdowns persist, which could hurt energy uptake.
The EIA report released Friday also showed that gasoline supply fell by 300,000 million barrels, while distillate stockpiles were up by 500,000 barrels. The S&P Global Platts survey had forecast supply increases of 2.7 million barrels for gasoline and 600,000 barrels for distillates.
Energy traders also tried to parse the Biden administration environmental policies to assess its impact on the oil complex. Biden signed an executive order canceling a presidential permit for the Keystone XL oil pipeline. The 1,700-mile pipeline was planned to carry roughly 800,000 barrels of oil a day from Alberta to the Texas Gulf Coast.
Also on Nymex Friday, natural-gas futures extended their decline even after EIA data revealed a slightly smaller-than-expected fall in U.S. supplies.
The EIA, which delayed the release of the natural-gas data by a day because of Wednesday’s inauguration, said domestic supplies of natural gas declined by 187 billion cubic feet for the week ended Jan. 15. On average, the data were expected to show a drop of 177 billion cubic feet for the week, according to analysts polled by S&P Global Platts.
February natural gas
shed 1.7% to $2.449 per million British thermal units, with front-month contract prices looking at a weekly loss of over 10%.