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Oil prices finish lower as traders rethink demand expectations

MarketWatch logo MarketWatch 1/24/2023 Myra P. Saefong
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Oil futures finished lower on Tuesday, pulling back from recent gains that lifted prices to their highest level in two months, with weakness in the U.S. economy prompting traders to rethink their energy demand expectations.

Prices for oil have seen support since the start of the year on continued optimism over the demand outlook from China after the country dropped COVID restrictions.

Natural-gas futures, meanwhile, settled lower after posting a gain of more than 6% a day earlier on forecasts for colder U.S. weather.

Price action
  • West Texas Intermediate crude for March delivery fell $1.49, or 1.8%, to settle at $80.13 a barrel on the New York Mercantile Exchange.
  • March Brent crude the global benchmark, lost $2.06, or 2.3%, to $86.13 a barrel on ICE Futures Europe. April Brent the most actively traded contract, settled at $86.25 a barrel, down $1.91, or 1.1%.
  • Back on Nymex, February gasoline fell 1.8% to $2.6487 a gallon, while February heating oil shed 3.5% to $3.4272 a gallon.
  • February natural gas declined by 5.5% to $3.258 per million British thermal units, ahead of its Friday expiration. March natural gas the most actively traded contract, declined by 5.1% at $3.057 per million BTUs.
Market drivers

Oil prices declined on “uncertainty about how much of a demand boost we’ll see, and concerns over a weakening U.S. economy constrains the upside,” said Michael Hewson, chief market analyst at CMC Markets U.K.

“With the latest PMI numbers in Europe and the U.K. showing signs of weakness despite lower energy prices, some doubt is creeping in around any sort of rebound in economic activity,” he said in market commentary.

There have also been worries about weakness in the U.S. that could hurt oil demand. On Tuesday, an S&P survey showed that U.S. businesses contracted again in January as demand for goods and services fell for the fourth month in a row.

The survey did show some signs of modest improvement, however. The S&P Global “flash” U.S. services sector index rose to a three-month high of 46.6 from 44.7 in December. The service side of the economy employs most Americans. Any number below 50 suggests a contracting economy.

Crude-oil prices saw a mixed finish Monday, with WTI losing ground as Brent extended its winning streak to a third session. Expectations for a pickup in crude demand from China have served to support crude since a dip to start the year.

On Feb. 5, the European Union will impose a ban on imports of Russia-refined petroleum products, and a price cap on Russian oil products will also take effect. That follows an EU embargo and G7 price cap on Russian seaborne oil last month.

“A key question is whether these measures are already lowering or will further lower Russian oil production,” said Stephen Innes, managing partner at SPI Asset Management, in a market update.

Meanwhile, the OPEC+ Joint Ministerial Monitoring Committee (JMMC), which reviews the oil market, is expected to meet on Feb. 1. The next full meeting of members of the policy-setting Organization of the Petroleum Exporting Countries and their allies is scheduled for June.

The JMMC is expected to “endorse the producer’s group’s current output policy and hope that Chinese demand will balance out worries over inflation and global economic slowdown,” the Kansas City energy at StoneX wrote in a Tuesday report.

The U.S. will get a weekly update on petroleum supplies from the Energy Information Administration on Wednesday. On average, analysts expect the report to show supply declines of 2.4 million barrels for crude, 100,000 barrels for gasoline and 1.6 million barrels for distillates, according to a survey conducted by S&P Global Commodity Insights.

It’s the second week in a row with no release of oil from the Strategic Petroleum Reserve, “but at the same time refinery maintenance could lead to an increase in crude oil supply,” Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch.

There’s an “expectation that we could see an increase in supply in the Cushing, Okla. delivery point,” he said. However, oil products are “still very tight and the focus will be on both gasoline and diesel supplies.”

Natural gas has rebounded this week after a sharp slump to begin the year amid unseasonably warm temperatures across much of the U.S. Still, it remains down more than 20% so far in January, after a selloff that left the commodity deeply oversold and vulnerable to a short-covering rally, wrote analysts at Sevens Report Research.

“Looking ahead, more volatile trade is likely with the market susceptible to squeezy rallies, but the current trend is decidedly bearish right now with a break below $3.00 a distinct possibility in the months ahead,” they wrote.


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