Oil Futures Retreat from Fresh Highs as China Sputters


   
   CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York 
Mercantile Exchange and Brent crude on the Intercontinental Exchange settled 
mostly lower, reversing from fresh multiyear highs after U.S. industrial 
production unexpectedly declined in September while China's economy grew more 
slowly than anticipated in the third quarter.

   U.S. industrial output fell 1.3% in September against expectations for a 
modest 0.2% gain, while the Federal Reserve in reporting the data also revised 
August's production number down from a 0.4% increase to 0.1% downtick. 
Hurricane Ida-caused disruptions, which made landfall Aug. 29 along the 
Louisiana coastline, were responsible for 0.6% of the September decline, and 
for 0.3% of the 0.7% falloff in manufacturing activity last month. The 
continued shortages of semiconductors led to a 7.2% plunge in the production of 
motor vehicles and parts and caused more than half of the drop off in factory 
output last month.

   The disappointing report from the Federal Reserve followed data released 
overnight by the National Bureau of Statistics showing industrial output in 
China slowed well below a 4.5% consensus for September to 3.1%, pressured by an 
energy supply crunch while China's economy grew 0.3% slower than expected 
during the third quarter with a 4.9% expansion rate. Weak real estate market 
saddled with a mountain of debt, COVID-19 mitigation efforts -- with Beijing 
pursuing a zero-COVID policy, and an energy shortage that have prompted 
incidents of factory workers working by candlelight, converged to limit growth 
in the world's second largest economy. In late September, China's Vice Premier 
Han Zheng, who oversees the country's energy sector and industrial production, 
directed the country's energy companies to secure enough energy for the winter 
at all costs.

   Oil futures had rallied to fresh highs overnight on tightening global oil 
supplies following surging electricity and natural gas prices in the European 
Union and Asia, with coal and gas supplies low in China and India. Department 
of Energy reported China was the top importer of U.S. liquified natural gas in 
August with 51.7 billion cubic feet, the most recent data available, while 
India is seeking expedited LNG deliveries from Qatar, according to Reuters.

   In the United Kingdom, small power companies are folding under the strain of 
record high wholesale gas prices, with gas inventory already low following last 
winter further depleted during the summer months to address cooling demand 
because wind generated power fell short. Gas supply is short throughout much of 
the EU amid the rapid transition away from fossil fuels, namely coal 
generation. Oil investments have declined for several years, limiting the 
ability to quickly ramp up output.

   Oil demand has also strengthened with global economic growth, with the 
International Energy Agency forecasting world oil consumption would increase 
annually by 5.5 million bpd this year and another 3.3 million bpd in 2022 to 
99.6 million bpd, slightly above demand before the pandemic.

   The energy shortage in Asia and the EU is expected to worsen during the 
winter months, especially if the winter is colder-than-usual, prompting 
gas-to-oil switching that is expected to add 500,000 bpd to more than 1 million 
bpd of demand for crude oil this winter.

   The energy crunch is seen driving oil prices higher during the fourth 
quarter despite today's pullback, with reports indicating the White House has 
again requested the Organization of the Petroleum Exporting Countries to add 
more barrels to the global oil market. OPEC, along with Russia-led partners, 
agreed earlier this month to lift their output by 400,000 bpd in November, 
maintaining their July agreement of monthly increases of 400,000 bpd through 
the year as they unwind production cuts put in place in April 2020 in response 
to the COVID-19 pandemic led crash in world oil demand.

   U.S. crude production increased 100,000 bpd to 11.4 million bpd during the 
first week of October, according to the most recent data available from the 
Energy Information Administration, with EIA last week projecting U.S. output 
would average 11.3 million bpd this year. This afternoon, EIA said it expects 
oil production from the seven key oil producing regions in the United States to 
increase by 77,000 bpd to 8.219 million bpd from October to November.

   NYMEX West Texas Intermediate futures for November delivery edged up $0.16 
for an $82.44 bbl settlement ahead of expiration Wednesday afternoon, falling 
back from an $83.87 high, with the December contract ending at a $0.75 discount 
to the expiring contract. December Brent futures on ICE recoiled from an $86.04 
three-year high on the spot continuous chart, with the previous high reach in 
October 2018 at $86.74, to settle down $0.53 at $84.33 bbl.

   November RBOB futures on NYMEX ended two points higher at $2.4866 to add to 
its string of consecutive session gains now at eight, paring a rally to $2.5135 
gallon. NYMEX November ULSD futures settled down 2.45cts at $2.5492 gallon 
after trading as high as $2.6080 gallon.

    

    

   Brian L. Milne, 1.402.255.8020, brian.milne@dtn.com, www.dtn.com.




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