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Oil Futures Turn Higher on Bets for Higher Demand from China

Oil futures turn higher Thursday, giving up early losses, as traders bet on higher crude demand after a report said China told state-owned energy companies to build their reserves to meet power needs for the winter.

China told top state-owned energy companies to secure winter supplies at all costs, with the order coming directly from Vice Premier Han Zheng during a meeting earlier this week with officials from Beijing’s state-owned assets regulator and economic planning agency, Bloomberg reported, citing people familiar with the matter.

“This could be a game changer for crude oil,” said Phil Flynn, senior market analyst at The Price Futures Group.

U.S. benchmark crude oil prices had been pressured by a bounce back in domestic production to more than 11 million barrels a day last week, he said. Forecasts for a warmer October than typical in the past also took the heat off the tight supply situation, he said.

Now, “China is realizing that this energy crisis could impact all parts of the economy because of coal shortages,” said Flynn. China has suffered from power blackouts due, in part, to high prices and shortages of coal and natural gas.

“They have to use alternative sources of energy to keep the lights on,” Flynn said. “Forced switching of energy sources from coal is going to require more oil” and, because of the coal and natural-gas shortage, demand for oil will increase.

“The U.S. may be a beneficiary as they are a discount to the rest of the global market,” he added.

November West Texas Intermediate crude rose 54 cents, or 0.7%, to trade at $75.37 a barrel on the New York Mercantile Exchange after trading as low as $73.14.

Global benchmark November Brent crude  however, was down 4 cents, or nearly 0.1%, at $78.60 a barrel on the ICE Futures Europe exchange ahead of its expiration at the end of the trading session. The most-active December Brent contract tacked on 60 cents, or 0.8%, to $78.69 a barrel.

For the month, WTI is headed for a gain of more than 10%, while Brent is on track for a rise in September of almost 9%, based on the front-month contracts. For the quarter, WTI is set for a climb of over 6%, while Brent is staring at a nearly 8% advance, FactSet data show.

Oil prices had been trading lower before the Bloomberg report, as data Wednesday revealed a weekly rise in U.S. crude inventories after seven consecutive weeks of declines on the back of storm disruptions in the Gulf of Mexico.

“Inventories rose as suppliers resumed activity to pre-pandemic levels after production was curbed in the Gulf of Mexico, after not one, but two hurricanes hit the region,” wrote Naeem Aslam, chief market analyst at AvaTrade, in a daily research note.

The EIA reported on Wednesday that U.S. crude inventories rose by 4.6 million barrels for the week ended Sept. 24. That defied expectations for an average decline of 4.5 million barrels expected by analysts polled by S&P Global Platts.

Despite the latest supply build, “the overall trend of massive draws over the past weeks has still left U.S. storage levels low enough that there is still an overarching bullish sentiment when it comes to U.S. onshore crude stockpiles,” said Louise Dickson, senior oil markets analyst at Rystad Energy, in Thursday commentary.

Also on Nymex, October gasoline rose 1.4% to $2.259 a gallon, but front-month prices were up over 5% for the month, and looking at an increase of nearly 8% for the quarter. October heating oil added 1.9% to $2.352 a gallon, trading more than 10% higher for the month and quarter. The October contracts expire at the end of the session.

Moves for oil come as the Organization of the Petroleum Exporting Countries and allies, a group known as OPEC+, are set to meet on Monday to discuss their plans for global production in the recovery from the pandemic.

There are some signs that the global economic recovery could see some challenges, which could factor into OPEC’s thinking. There are growing signs that China, the world’s second-largest economy, and one of crude’s biggest importers, is seeing business activity decelerate. China’s manufacturing purchasing managers index fell to 49.6 in September, the National Bureau of Statistics in Beijing said Thursday, marking its first drop below 50, a dividing line between expansion and contraction, since February.

OPEC+ last met on Sept. 1 and agreed to adhere to its July agreement to raise overall production by 400,000 barrels a day each month from August and eventually erase the output curbs put in place last year due to weaker energy demand from pandemic-related economic restrictions.

The collective is expected to keep the current oil output agreement in place at its coming gathering, but there may be increasing pressures to boost production with crude prices at elevated levels.

Rounding out action on Nymex, prices for natural gas extended earlier gains the U.S. Energy Information Administration reported that domestic supplies of natural gas rose by 88 billion cubic feet for the week ended Sept. 24.

That was nearly the same as the average increase of 87 billion cubic feet forecast by analysts polled by S&P Global Platts.

November natural gas was up 3.3%, at $5.661 per million British thermal units. Prices traded 28% higher for the month, poised for a quarterly rise of about 55%.

Source: Marketwatch