Prices rose last year on worries of Europe freezing due to the loss of Russian fuel, as OPEC Plus cut production targets and as critically low US distillate stocks raised the prospect of fuel export curbs.
Those fears have proven overblown, driving prices down. European gas stocks are well above seasonal norms, Saudi Aramco cut prices for oil shipped to Asia, and OPEC members’ output unexpectedly rose last month, a Reuters survey found.
Warmer than the usual temperature in the United States and Europe also have cut the need for gas and oil for heating.
US natural gas tumbled about 18% in the first week of January, the biggest slide on record to start a year, according to Refinitiv Eikon data. The 12% drop in distillate futures, was the biggest dive to start a year since 1991. Distillate consumption typically rises on winter season demand.
US West Texas Intermediate (WTI), Brent and US gasoline futures all had their biggest weekly decline to start a year since 2016, with WTI down 7.4%, Brent 7.3% and US gasoline 7.3%.
“Some of the greatest fears in 2022 never got realized,” said John Kilduff, partner at Again Capital LLC in New York. While OPEC’s spare capacity is limited, traders see additional supplies coming from Guyana, Brazil and Canada, he said.
The specter of recession raised new questions about demand. Disappointing US employment and manufacturing data, and rising COVID-19 cases in China have stoked fears of a global recession, which would slash fuel demand.
Lately, China lifted its export refined products export quotas, signaling weaker domestic demand ahead.
Expectations that prices will recover have resulted in front-month prices for the US and Brent crude benchmarks trading weaker to second-month contracts, a market structure known as contango. This incentivizes traders to buy and store fuel.
Farther out, front-month US crude contracts traded on Thursday as low as 56 cents less than prices in six months, the widest discount since December 2012.
In natural gas, US futures fell further on January 6, dropping 5% to US$3.52 per million British thermal units during the session, its lowest since July 2021.
“January 2023 is off to the warmest start in more than 15 years,” analysts at energy consulting firm EBW Analytics told customers in a note.
It is too early to tell whether prices will quickly recover. The oil curve may strengthen as demand recovers and as the market works through spare OPEC capacity, analysts at Goldman Sachs said.
The bank predicted Brent would average US$90/barrel in 2023, down from US$110 earlier. This week, it forecast US natural gas prices would drop to US$4.20 per million British thermal units in the second quarter through the third quarter.
Oil prices were little changed on Friday as the market balanced a weaker US $ and mixed US jobs reports, but both crude benchmarks ended the first week of the year lower due to global recession concerns.
Brent futures fell to settle at US$78.57/barrel, while WTI rose to US$73.77.
For the week, both Brent and WTI were down over 8%, their biggest weekly dives to start the year since 2016. Both benchmarks had gained about 13% during the prior three weeks.
“The oil market might be regaining some composure following the bloodbath earlier this week, but the upside potential remains limited, at least in the near term. The economic outlook is clouded,” PVM analyst Stephen Brennock said.
US services industry activity in November contracted for the first time in more than 2-1/2 years, according to a report from the Institute for Supply Management (ISM).
But another report showed the US economy added jobs at a solid clip in December 2022, pushing the unemployment rate back to a pre-pandemic low of 3.5% as the labor market remains tight.
That US jobs report caused the US$ to rally as investors bet that inflation is easing and the US Federal Reserve (Fed) need not be as aggressive as some feared.
A weaker US$ can boost demand for oil, as dollar-denominated commodities become cheaper for holders of other currencies.
Atlanta Federal Reserve (Fed) President Raphael Bostic said the latest U.S. jobs figures are another sign that the economy is gradually slowing and should that continue the Fed can step down to a quarter percentage point interest rate hike at its next policy meeting.
The world’s top crude exporter, Saudi Arabia, lowered prices for the Arab light crude it sells to Asia to its lowest since November 2021 amid the global pressures hitting oil.
Stock markets in China, the world’s largest crude oil importer, logged a five-day winning streak on Friday on investors’ expectations that the Chinese economy would soon emerge from its COVID woes and stage a robust recovery in 2023.
But, more countries around the world are demanding visitors from China take COVID tests, days before China drops border controls and ushers in an eagerly awaited return to travel for a population that has been largely stuck at home for three years.
Eurozone inflation tumbled last month but underlying price pressures are still rising and economic growth indicators are surprisingly benign, suggesting that the European Central Bank will keep raising interest rates for months to come.
India’s government expects economic growth to slow in the financial year ending March, as pandemic-related distortions ease and pent-up demand for goods levels out going into 2023.