Oil prices slide on fears over China’s COVID surge, while U.S. inventories rise

Price action

• West Texas Intermediate crude for February delivery
  CL.1,
  -1.28%
   
  CL00,
  -1.28%
   
  CLG23,
  -1.28%
  fell 84 cents, or 1.1%, to $78.12 a barrel on the New York Mercantile Exchange.

• February Brent crude
  BRNG23,
  -1.36%,
  the global benchmark, was down $1.05, or 1.3%, at $82.21 a barrel on ICE Futures Europe. March Brent
  BRN00,
  -1.31%
   
  BRNH23,
  -1.31%,
  the most actively traded contract, declined 90 cents, or 1.1%, to $83.09 a barrel.

• Back on Nymex, January gasoline
  RBF23,
  -0.52%
  was up 0.1% at $2.374 a gallon, while January heating oil
  HOF23,
  -3.01%
  dropped 2.7% to $3.287 a gallon.

• February natural-gas futures
  NGG23,
  -4.65%
  fell 3.5% to $4.519 per million British thermal units.

Market drivers

Oil-market bulls initially cheered China’s relaxation of COVID-19 curbs. The country’s zero-COVID policy, which resulted in large-scale shutdowns in an attempt to hold off the virus, was seen significantly holding back demand for crude by one of the world’s largest energy consumers in 2022.

But a surge in infections in China following the lifting of restrictions, and concerns about travelers spreading cases outside the country, have stoked another round of near-term demand concerns, analysts said.

“It’s been quite the shift from fighting every case to living with the virus and that creates enormous uncertainty for the start of the year as case numbers surge and the health system is overwhelmed,” said Craig Erlam, senior market analyst at Oanda, in a note. “How the leadership will respond is about as clear as the data itself so for investors it will be a case of learning as we go using what little data and anecdotal evidence we have.”

See: Global oil demand could see surprise surge in 2023, says top hedge-fund trader

Supply data

The Energy Information Administration on Thursday said U.S. crude-oil inventories rose by 700,000 barrels last week. Gasoline inventories fell by 3.1 million barrels, while distillate stocks rose 300,000 barrels.

Analysts surveyed by S&P Global Commodity Insights, on average, had expected crude inventories to show a 3 million barrel decline, while gasoline stocks were expected to show a fall of 2.2 million barrels and distillates were seen down 800,000 barrels.

“Weaker exports and higher refining activity faced off against stronger imports and lower production, SPR (Strategic Petroleum Reserve) barrels were once again added into the mix, all resulting in a stalemate, with a minor build to crude stocks,” said Matt Smith, lead oil analyst for the Americas at Kpler.

“There was a decent draw to gasoline inventories amid a tick higher in implied gasoline demand, as consumers dashed to the pumps ahead of both holiday travel and the bomb cyclone, while distillates showed a minor build as demand waned week-on-week,” he said.

The American Petroleum Institute late Wednesday reported a 1.3 million barrel drop in U.S. crude inventories last week, according to a source citing the data. The industry trade group saw a 510,000 barrel rise in gasoline stocks, while distillates saw a rise of 388,000 barrels.

Separately, the EIA reported that natural gas in storage saw a withdrawal of 213 billion cubic feet. Analysts surveyed by S&P Global Commodity Insights had expected the data to show a net withdrawal of 196 billion cubic feet.