Oil futures settled lower on Wednesday, with U.S. prices posting their first loss in nine sessions.
Prices for the commodity had climbed to their highest intraday levels since early December on expectations for stronger energy demand following the reopening of China’s economy, with the International Energy Agency boosting its forecast for crude demand growth in 2023.
Oil prices turned lower, however, after comments from a U.S. Federal Reserve official renewed uncertainty over the pace of upcoming interest-rate hikes — raising uncertainty over the outlook for the U.S. economy.
Price action
West Texas Intermediate crude for February delivery
CL.1,
-1.23%
CL00,
-1.23%
CLG23,
-1.23%
fell 70 cents, or 0.9%, to settle at $79.48 a barrel on the New York Mercantile Exchange after trading as high as $82.38. Price settled lower for the first time in nine sessions.
March Brent crude
BRN00,
-0.32%
BRNH23,
-0.32%,
the global benchmark, lost 94 cents, or 1.1%, at $84.98 a barrel on ICE Futures Europe, after touching a high of $87.85. Both WTI and Brent had touched their highest intraday levels since Dec. 5, according to FactSet.
Back on Nymex, February gasoline
RBG23,
-1.09%
shed nearly 0.9% to $2.5235 a gallon, while February heating oil
HOG23,
-0.01%
gained 0.4% to $3.263 a gallon.
February natural gas
NGG23,
-8.37%
lost 7.7% to $3.311 per million British thermal units after posting a gain of 4.9% on Tuesday. The settlement was the lowest for a front-month contract since June 22, 2021.
Market drivers
Oil prices had spent much of the session trading higher, buoyed by expectations for higher energy demand from China.
However, oil turned lower following comments Wednesday by St. Louis Fed President James Bullard, said Phil Flynn, senior market analyst at The Price Futures Group.
Bullard suggested that despite cooling U.S. inflation data and soft retail sales, the Federal Reserve still needs to move quickly to get to benchmark interest rates above 5%.
That “raised fears that the Fed may raise rates at the 50 basis point clip again,” said Flynn, providing some support for the U.S. dollar and pressuring prices for dollar-denominated commodities such as oil.
Traders have also been concerned that aggressive U.S. interest rate rises could lead to a recession and lower energy demand.
Early Wednesday, the Paris-based IEA lifted its forecast for oil-demand growth this year by nearly 200,000 barrels a day to 1.9 million barrels a day. The extra demand means that the IEA now expects total oil demand this year to average 101.7 million barrels a day, well above pre-pandemic levels and a record amount.
China’s strict COVID restrictions were seen keeping a lid on crude demand until December, but the country’s rapid lifting of curbs on business and consumer activity purred optimism over the demand outlook, helping to lift crude demand in the new year.
The IEA raised its forecast for Chinese demand by 100,000 barrels a day to 15.9 million barrels a day.
“The return of China’s consumption engines is enormous for the oil market outlook,” said Stephen Innes, managing partner at SPI Asset Management. “While the industrial engine is revving up, guzzling down oil products, consumers will soon catch up at the petrol pump.”
Crucially, the accumulation of household savings is “massive, and has risen fast over the past three years,” he said in a market update. “Ultimately, when Chinese consumers start spending, it will boost oil prices.”
Output data from China showed that oil refiners processed around 14.17 million barrels a day (mb/d) of crude in December, down from 14.69 mbd in November but up 2% year over year, noted Warren Patterson and Ewa Manthey, strategists at ING, in a note. Full-year 2022 numbers averaged 13.57 mb/d, down almost 4% year over year.
“Weaker domestic demand and low refined product export quotas would have weighed on refinery runs through 2022. Activity should recover this year, given the expected recovery in oil demand following China’s reopening, along with the government releasing larger volumes of refined product export quotas more recently,” they wrote.
Back in the U.S., weekly data on domestic petroleum supplies from the Energy Information Administration will be released Thursday, a day later than usual because of Monday’s Martin Luther King Jr. Day holiday.
The previous EIA report, released last week, showed commercial crude stocks adding 19 million barrels for the week ended Jan. 6 —- the third highest increase on record, analysts said.
“Traders are betting that the figure is more of a short-term anomaly, caused by trade disruptions from extreme winter weather in late December and a temporary drop in refinery activity,” Robbie Fraser, manager, global research & analytics at Schneider Electric, wrote in daily note.
