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Oil prices end higher on Middle East supply worries, signs of stronger Chinese demand

MarketWatch logo MarketWatch 2/6/2023 Myra P. Saefong
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Oil futures finished higher on Monday, buoyed by signs of stronger demand from China and concerns over supplies in the Middle East.

Prices shook off early declines that had pulled prices for U.S. benchmark oil to their lowest since December.

Price action
  • West Texas Intermediate crude for March delivery rose 72 cents, or 1%, to settle at $74.11 a barrel on the New York Mercantile Exchange after trading as low as $72.25. The U.S. benchmark fell 7.9% last week to end Friday at its lowest since Jan. 4.
  • April Brent crude the global benchmark, climbed $1.05, or 1.3%, to settle at $80.99 a barrel on ICE Futures Europe. It fell 7.5% last week to end Friday at its lowest since Jan. 4.
  • March gasoline rose 2.3% at $2.3734 a gallon, while March heating oil lost 0.2% at $2.7687 a gallon.
  • March natural gas rose nearly 2% to $2.457 per million British thermal units, after dropping more than 15% last week and finishing Friday at its lowest since Dec. 28, 2020.
Market drivers

Saudi Arabia unexpectedly lifted most prices for oil that will be shipped to Asia in March, Bloomberg reported Monday.

The higher prices offer a sign of stronger than anticipated Chinese oil demand, and that should give the market a lot of support amid growing concerns about spare oil production capacity, said Phil Flynn, senior market analyst at The Price Futures Group.

Oil prices also found support after a major earthquake halted operations at Turkey’s oil terminal in Ceyhan and flows through Iraq’s northern oil export pipeline from Kirkuk. Turkish pipeline operator BOTAS said there was no damage on main pipelines carrying oil from Iraq and Azerbaijan to Turkey, Reuters reported.

Read: Turkey ETF tumbles and lira slumps to record low after major earthquake adds to economic woes

Oil had been declining “in sympathy with stocks amid rising interest rate and a strengthening [U.S.] dollar,” Tyler Richey, co-editor at Sevens Report Research, told MarketWatch.

WTI briefly took out the 2023 lows before the market “pivoted back higher on a wave of short covering given the uncertainties surrounding the earthquake in the Middle East,” he said. “Turkish exports at the port of Ceyhan were halted while the region’s main source of crude via a pipeline from Iraq were shut in, raising concerns about supply.”

“But as long as inspections don’t reveal any major damage that will keep the pipeline or port operations offline for more than a few days, the market impact should be limited,” said Richey.

Oil slumped last week as traders remained uncertain about the global demand outlook, including the scope for increased consumption from China following the Lunar New Year. Another large jump in U.S. stockpiles of crude also weighed on prices, analysts said.

The European Union on Sunday imposed a ban on Russian refined energy products, following on an earlier ban on seaborne Russian crude.

“The ban will have the largest impact on Russian diesel and naphtha flows to the EU. However, EU buyers have had time to prepare for the ban. In the period leading to the cutoff, there were increased flows of middle distillates to the EU and this has helped to push gas oil inventories in the ARA (Amsterdam-Rotterdam-Antwerp) region back up towards the 5-year average,” said Warren Patterson and Ewa Manthey, commodity strategists at ING, in a Monday note.

U.S. Treasury Secretary Janet Yellen on Friday said industrialized countries in the Group of Seven were imposing a price cap on refined Russian oil products such as diesel and kerosene, as part of a coalition that includes Australia and a tentative agreement from the European Union. A similar cap was previously placed on Russian oil exports, with the aim of reducing the financial resources available to Russian President Vladimir Putin to wage the nearly yearlong war in Ukraine.

The G-7 set a price cap of $100 on so-called “high-value” Russian exports such as diesel and gasoline and $45 on “lower-value” products such as fuel oil. 

The price caps are above the market price for reformulated gasoline and nearly in line with the market price for diesel, said Troy Vincent, senior market analyst at DTN. “It is unlikely that the caps will have a material impact on global supply.”

Meanwhile, natural gas failed last week to benefit from a short-lived cold snap that brought extremely low temperatures to the U.S. Northeast. U.S. prices posted a15% loss last week, then tacked on nearly 2% Monday.

“After a couple nights of record temps in New England, heating demand disappeared as fast as it appeared,” wrote analysts at the Schork Report on Monday.

Nearly three-fifths of the way through heating season, the market has delivered 1.061 trillion cubic feet (tcf) of gas out of underground storage in the Lower 48 U.S. states — less than half of last summer’s 2.262 tcf injection, they said. If nothing happens to change the trajectory, storage is on track to end winter around 1.742 tcf, well above the Energy Information Administration’s forecast of 1.493 tcf and last year’s ending balance of 1.382 tcf, the analysts wrote.


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