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, firstname.lastname@example.org, www.dtn.com.
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