Oil futures fall 10% for week as China’s COVID worries darken demand picture

Natural-gas futures joined the broader energy space in Friday’s retreat after a mixed early session. Natural gas had bucked the late-week downtrend for the sector, boosted in part as U.S. government data showed a weekly increase in domestic supplies that packed no surprises for the market.

• West Texas Intermediate crude for December delivery
  CL.1,
  +0.04%

  CLZ22,
  +0.04%
  fell $1.56, or 1.9%, at $80.08 a barrel on the New York Mercantile Exchange Friday. Prices marked the lowest settlement for a front-month contract since Sept. 30, according to Dow Jones Market Data. The contract shed 9.98% for the week.

• January Brent crude 
  BRN00,
  +0.14%

  BRNF23,
  +0.14%
  shed $2.16, or 2.4%, at $87.62 a barrel on ICE Futures Europe Friday, settling at the lowest since Sept. 27. It’s down 8.7% for the week.

• December natural gas
  NGZ22,
  +1.17%

  NG00,
  +1.16%
   shed 6.60 cents, or 1.04%, at $6.3030 per million British thermal units Friday. The contract is up 7.2% for the week.

• December gasoline RBZ22 lost 1.4% to $2.4213 a gallon Friday, while December heating oil HOZ22 eased 0.2% at $3.5168 a gallon.

Market drivers

Crude oil prices have come under pressure this week as demand concerns, especially from economic giant China, outweighed signs of tighter supplies.

China’s State Council warned cities to avoid “irresponsible loosening” of COVID-19 measures, according to the South China Morning Post. The Wall Street Journal reported a sevenfold surge in COVID infections in the past two weeks in China, even as the nation’s new policy of loosened measures was aimed at reducing the impact of zero-COVID restrictions.

On the supply side, traders ponder how much crude oil is going to come off the market once the Dec. 5 seaborne Russian oil embargo kicks in and whether there will be an effective price cap that allows Russia oil to hit the markets, but at a lower price.

Read: Why the EU ban and G7 price cap on Russian oil won’t guarantee a lasting rally for oil

Also see: U.S. drivers are likely to pay highest Thanksgiving gas prices on record

“The market will no doubt be focusing its attention on OPEC+ supply in the next few weeks, as it remains to be seen how much daily output will actually decline after the official announcement of a 2-million-barrel reduction,” said Barbara Lambrecht, writing for the Commerzbank commodities research team, in a daily note.

“It is still unclear what impact the upcoming European Union embargo and the price cap that is to be set in the next few days will have on Russian supply,” the analysts continued in their note. “As yet, Russia still appears to be finding sufficient buyers and is even stepping up its oil production. That said, we are convinced that these two factors will drive down supply, which should lend support to prices in the coming weeks.”

Analysts at UBS Global Wealth Management reaffirmed a view that oil prices can’t stay down considering the supply outlook.

“We continue to think selling volatility in crude oil is an appealing strategy, and recommend risk-taking investors to add long positions in longer-dated Brent oil contracts, which we think have underpriced the potential for energy prices to stay higher for longe,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

“We think the oil market will tighten further as OPEC+ is scaling back its production and the EU’s ban on Russian crude will weigh on Russian oil production,” he added.

The U.S. dollar’s movement was also in focus and could continue to impact commodities trading priced in the U.S. unit.

The greenback
DXY,
+0.26%
was little changed Friday, after a sharp fall to three month lows this week, but the bombardment of hawkish talk from Federal Reserve officials continued to help set the tone in broader financial markets
SPX,
+0.48%
on Friday.

“Every time a piece of good news on the inflation front leads to some loosening of financial conditions, the Fed sees no choice but to rein in the optimism…,” said Raffi Boyadjian, lead investment analyst with XM.

“But the most dramatic intervention came on Thursday when St. Louis Fed President James Bullard suggested that rates may need to go as high as 7% in the worst case scenario, with a 5-5.25% target range being the minimum level required to combat high inflation,” he added.

Climate change and energy-transition talks in Egypt, known as the U.N.’s COP27, were at risk of overruning Friday’s official end to the two-week summit.

But as talks slowed, the EU’s top climate official made a surprise offer. He proposed a two-pronged approach that would create a pot of money for poor countries and push for steeper cuts of heat-trapping emissions by all countries, as well as the phasing down of all fossil fuels, including natural gas and oil. Talks at these summits do sometimes extend past the official close of meetings.

Related: U.S. is main block to climate compensation plan at COP27: analyst

Supply data

Baker Hughes
BKR,
-2.35%
 on Friday reported that the number of active U.S. rigs drilling for oil rose by one to 623 this week. That followed an increase of nine in the previous week, and is a third straight weekly rise. The total active U.S. rig count, which includes those drilling for natural gas, climbed by three to 782, according to Baker Hughes.

Reported Thursday, U.S. natural-gas supplies climbed by 64 billion cubic feet for the week ended Nov. 11 to about 3.6 trillion cubic feet, according to data from the Energy Information Administration.

That reading compared with an average analyst forecast for an increase of 62 billion cubic feet, according to a survey conducted by S&P Global Commodity Insights.