For a third day, oil gained as industry data indicated US crude stockpiles were substantially drawn down, and the next OPEC+ meeting approached, where it is expected the Cartel will impose another production cut to support falling prices amid flagging demand.
US benchmark West Texas Intermediate rose toward $79 per barrel after gaining 2.5% in the two previous sessions. Meanwhile the American Petroleum Institute issued data showing that reported inventories declined by almost 8 million barrels over the previous week, according to sources familiar with the data. The official numbers are to be released Wednesday.
OPEC and its allied countries including Russia, also known as OPEC+, will hold a virtual meeting on December 4th. Analysts expect the Cartel will chose to curtail output yet again, amid flagging demand globally, and increasing signs China may be heading for a more aggressive series of lockdowns which will further shutter their economy.
The meeting will occur just one day before a deadline, on which European Union sanctions on Russian crude flows will go into effect. The EU will ultimately seek to impose a market-wide price cap, on Russian oil sales, however that is still to be finalized.
So far this month, crude is down about 9% amid concerns both, of a pending global economic downturn which will drastically reduce demand, and market metrics pointing to a glutted near-term supply.
Meanwhile in China, Covid-19 cases are surging to new records every day, and as the government seeks to impose the lockdowns and mass testing it has used historically to quell outbreaks, the public is revolting, in some cases violently. That is risking a government over-reaction which will shutter the economy more forcefully, and possibly for longer. Already, analysts are saying rioting over lockdowns at a Foxconn facility which produces iPhones is set to cost Apple 6 million units, returning the iPhone market to the days of Covid-19 pandemic supply chain shortages, even as it darkens the outlook for oil demand in the world’s second-largest economy.
Yeap Jun Rong, market strategist at IG Asia Pte said, “While we could see a positive reaction on any indications of further supply curbs from the bloc, it may take much more to convince markets of a sustained trend reversal to the upside. The demand outlook will play a significant role.”
New data out of China on Wednesday showed Factory and services activity contracted further in November as the government continues to increase the spread and depth of lockdowns throughout society in an attempt to contain the number of new local cases detected daily.
Meanwhile the time spreads of key crude grades continue to signal an abundant near-term supply, as both European benchmark Brent and American benchmark WTI show prompt spreads (the gap between the nearest two contracts), to be in bearish contango patterns. Brent was $1.27 per barrel in contango, as opposed to being $0.66 in the opposite backwardated price structure last week.
