Stronger demand outlook lifts oil, as traders digest a hefty U.S. supply climb and Fed policy decision

Meanwhile, the Fed announced a 50 basis-point increase to its benchmark interest rate, but central bank officials also penciled in a higher top end for its benchmark rate.

Price action

• West Texas Intermediate crude for January delivery
  CL00,
  +2.61%
   
  CL.1,
  +2.61%
   
  CLF23,
  +2.61%
  rose $1.89, or 2.5%, to settle at $77.28 a barrel on the New York Mercantile Exchange, the highest front-month finish since Dec. 2, according to Dow Jones Market Data.

• February Brent crude
  BRN00,
  +0.16%
   
  BRNG23,
  +0.16%,
  the global benchmark, was up $2.02, or 2.5%, at $82.70 a barrel on ICE Futures Europe.

• Back on Nymex, January gasoline
  RBF23,
  +3.87%
  rose 3.9% to $2.444 a gallon, while January heating oil
  HOF23,
  +5.64%
  added 6% at $3.2768 a gallon, the highest since Nov. 30.

• January natural gas
  NGF23,
  -8.31%
  dropped 7.3% to $6.43 per million British thermal units after tacking on 5.3% on Tuesday.

Market drivers

The Paris-based International Energy Agency on Wednesday raised its forecast for oil-demand growth for 2022 by 140,000 barrels a day to 2.3 million barrels a day. For 2023, the IEA also lifted its demand growth forecast by 100,000 barrels a day to 1.7 million barrels a day.

The IEA said a better-than-expected response to Europe’s energy crisis and surprising economic resilience among major Asian economies are boosting demand for oil as a heat source.

“There remains immense uncertainty over the outlook for crude demand and supply which is leading to plenty of volatility in oil markets,” said Craig Erlam, senior market analyst at Oanda, in a note.

“The price has rebounded in recent days after WTI fell close to $70, the level at which the White House has previously indicated it will start refilling the SPR following a year of repeatedly drawing it down,” he said.

Oil prices modestly pared their gains Wednesday after the Federal Reserve raised its benchmark interest rate by 0.5 percentage point and also penciled in 5.25% as the top end for its benchmark rate.

The “fear is that the Fed’s restrictive policy stance could ease the demand for oil, and keep prices under wraps,” said Phil Flynn, senior market analyst at The Price Futures Group.

Supply data

Oil prices continued to trade higher even after data from the Energy Information Administration released Wednesday showed that U.S. crude inventories rose by 10.2 million barrels for the week ended Dec. 9.

On average, analysts forecasted a decline of 3.5 million barrels, according to a poll conducted by S&P Global Commodity Insights. Late Tuesday, the American Petroleum Institute said crude inventories rose by 7.8 million barrels last week, according to a source citing the data.

Oil “exports were actually considerably lower on the U.S. Gulf last week than the EIA is reporting due to inclement weather,” Matt Smith, lead oil analyst, Americas, at Kpler, told MarketWatch, pointing out that the Houston Ship Channel suffered “multiple days of disruptions” due to fog.

Next week’s EIA report, however, “should whipsaw to a large draw, as exports recover and the Keystone [pipeline] outage is reflected in lower imports,” said Smith.  

The EIA data also included an upward “adjustment” of nearly 2.3 million barrels per day to petroleum supplies stocks.

The “adjustment factor shot through the roof…implying that the EIA not only continued to underestimate domestic crude production, but likely significantly overestimated crude exports and underestimated imports,” said Troy Vincent, senior market analyst at DTN.

The EIA also showed weekly inventory gains of 4.5 million barrels for gasoline and 1.4 million barrels for distillates. The analyst survey had called for increases of 3.2 million barrels for gasoline and 2.5 million barrels for distillates.

Crude stocks at the Cushing, Okla., Nymex delivery hub climbed by 500,000 barrels for the week, the EIA said, and stocks in the Strategic Petroleum Reserve fell by 4.7 million barrels.

Meanwhile, “recession worries in the West have been getting at least partially offset by optimism about China relaxing COVID restrictions and getting closer to reopening the economy,” said Tyler Richey, co-editor at Sevens Report Research.

Reports of surging COVID cases in major Chinese metropolitan areas this week have “left the path to reopening a bit less certain in the near term, but on a longer timeframe progress towards a normalizing economic environment should be supportive of energy prices,” he said.