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OIL FUTURES: Complex rises on China's easing of COVID-19 restrictions, tighter supplies
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China’s oil demand expected to rise in 2023
Sanctions, price cap to reduce Russian output
Still no restart date for Keystone Pipeline
Crude futures settled higher Dec. 13 amid a further easing of COVID-19 restrictions in China, and a tightening of supplies from Canada and Russia.
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NYMEX front-month crude settled $2.22 higher at $75.39/b, while ICE front-month Brent settled at $80.68/b, up $2.69.
In refined products, NYMEX front-month ULSD settled 12.37 cents higher at $3.0922/gal, while NYMEX front-month RBOB climbed 7.99 cents to settle at $2.1609/gal.
“Given the on-the-ground reality that the official zero-COVID policy is quickly thawing, oil traders are looking for that definitive bullish catalyst to hang their hat on, and they may have found one,” SPI Asset Management Managing Partner Stephen Innes said in a Dec. 13 note.
“With China planning to stop tracking some travel, policymakers are clearly shifting towards quarantine-free travel, boosting the economy and increasing oil demand,” he added.
China announced late Dec. 12 that a district in the city of Zhengzhou, where the country’s largest iPhone supplier has a vast facility, has released all high-risk zones from lockdown, local media said. The number of areas designated high risk has also fallen 85% to 4,500 from more than 30,000 on Dec. 7.
The move follows the government last week announcing it was relaxing COVID-19 restrictions after three years of enforcement, which analysts said would potentially boost oil demand.
S&P Global Commodity Insights analysts expect China’s oil demand to recovery by 700,000 b/d in 2023, especially in the second half of the year.
On the supply side, OPEC said Dec. 13 that it expects liquids production from its ally Russia to fall 850,000 b/d on the year in 2023.
OPEC sees Russian liquids output declining from 10.88 million b/d in the current quarter to 9.95 million b/d in Q1 2023, as the sanctions and price cap, which went into effect Dec. 5, begin to bite.
Analysts at S&P Global forecast that the initial oil market dislocations from the price cap and sanctions will lower Russian crude and condensate output by 1 million b/d between November and March, to 1.5 million b/d below pre-conflict levels, before edging higher in December.
US crude inventories have tightened, and likely fell again last week, in part due to the Keystone Pipeline outage.
Total commercial crude stocks likely dipped 3.5 million barrels to around 410.4 million barrels, according to analysts. The draw would put stocks at the lowest level since the week ended March 25, and leave them 9.2% behind the five-year average of US Energy Information Administration data.
At that level, inventories would be down around 30 million barrels since the week ended Nov. 4 — a near 7% decline over five weeks. This rate of decline far exceeds historic trends; EIA data shows an average draw of just 300,000 barrels during the same period over the past five years.
A rise in US refinery utilization has drawn down crude inventories.
US refining margins remain strong, led by diesel prices, which should encourage high run rates going forward.
Also, the Keystone Pipeline outage has removed over 600,000 b/d from the US market, and Midwest refiners in particular will likely begin pulling from storage to maintain run rates.
A restart date has yet to be released for TC Energy’s Keystone, which delivers Canadian crude to the US Midwest and US Gulf Coast. The pipeline has a nameplate capacity of 591,000 b/d, but in Q3 average throughput on Keystone was 622,000 b/d.
TC Energy shut the line down Dec. 7 following a leak in Washington County, Kansas, and is in the process of cleaning the roughly 14,000-barrel spill.
“Disruptions from the Keystone Pipeline remind us how tight the oil market remains,” said OANDA analyst Ed Moya. “The oil market can’t justify prices below the $70 level even if bumpy times are ahead.”
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