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Futures Movers: Oil ends higher as a major pipeline shutdown and improving Chinese demand outlook feed supply worries

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Oil futures ended higher on Monday, with the continued shutdown of the Keystone pipeline and an improvement in the outlook for Chinese energy demand, on the back of easing COVID-19 restrictions, raising concerns over tight crude supplies.

U.S. benchmark crude prices also ended back above $72 a barrel — the level at which the Biden administration may consider repurchasing oil to refill the nation’s oil reserve.

Price action

West Texas Intermediate crude for January delivery
CL.1,
+3.42%

 
CL00,
+3.42%

 
CLF23,
+3.42%

rose $2.15, or 3%, to settle at $73.17 a barrel on the New York Mercantile Exchange, posting the first gain in seven sessions. The U.S. benchmark tumbled more than 11% last week, ending Friday at the lowest for a front-month contract since Dec. 20, 2021, according to Dow Jones Market Data.

February Brent crude
BRN00,
+0.31%

 
BRNG23,
+0.31%
,
the global benchmark, added $1.89, or 2.5%, to $77.99 a barrel on ICE Futures Europe. Brent ended Friday at the lowest since Dec. 22, 2021, also shedding more than 11% last week.

Back on Nymex, January gasoline
RBF23,
+1.34%

edged up by 1.2% to $2.081 a gallon, while January heating oil
HOF23,
+5.83%

rose 6.3% to $2.9685 a gallon.

January natural gas
NGF23,
+3.92%

jumped 5.5% to $6.587 per million British thermal units.

Market drivers

WTI crude has outperformed Brent as investors continue to monitor the shutdown of the Keystone pipeline, following a leak last week that spilled 14,000 barrels of crude in Kansas.

The suspension of the Keystone Pipeline removes 600,000 daily barrels of oil supply in a market that “was already hanging with a razor-thin balance,” said Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.

Also see: Gasoline prices are down 5 week in a row, but an end to the declines may be on tap: GasBuddy

The pipeline’s Canadian operator, TC Energy Corp.
TRP,
+0.19%
,
on Sunday, said the spill remains contained but didn’t offer a timetable for a restart of the pipeline, which carries around 600,000 barrels a day of crude from Canada to Cushing, Oklahoma, where it can connect to another pipeline to the Gulf Coast.

Last week, oil fell sharply even as a European Union ban on imports of seaborne Russian crude and a Group of Seven price cap on Russian oil took effect and China took steps to ease curbs on activity aimed at containing the spread of COVID-19.

Analysts said crude weakness underlined growing fears of a potential global economic slowdown.

Oil traded lower into the weekend, but the pace of declines “slowed as WTI approached technical support between $70 and $72,” said analysts at Sevens Report Research in Monday’s newsletter. That price range is “fundamentally supported” by the Biden administration’s pledge to buy oil to replenish the Strategic Petroleum Reserve.

President Joe Biden had said in October that the administration would repurchase crude oil for the SPR when prices are at or below about $67-$72, adding to global demand for oil.

Meanwhile, China’s economic reopening is coming, said Edward Moya, senior market analyst at OANDA, in a market update. “It won’t happen overnight, but it will provide a major boost to demand in the outlook next quarter.” 

“Oil has too much support at the $70 level, which should suggest the recent change with China’s approach to fighting COVID could support a rally towards the $80 level,” he said.  

Still, Stephen Innes, managing partner at SPI Asset Management, warned that “an expected bumpy China reopening coupled with the scenario of a mild recession in Europe and the U.S. could lead to a harsher economic climate for oil markets.”

“After all, it was only a matter of time before the same slowdown that haunted stocks most of the year weighed on oil markets,” he said in emailed commentary.

In other energy dealings, natural gas rallied, as did heating oil, lifted by prospects for higher demand for heating fuel on the back of much colder weather.

The latest 6-to-10 day outlook from the National Weather Service’s Climate Prediction Center forecasts colder-than-usual weather across much of the U.S.

“According to the latest EIA data, U.S. natural gas inventory is around 58 [billion cubic feet] lower than the 5-year average at this point in the season and a stronger demand could tighten the market further in the short term,” said commodity analysts at ING, in a note.

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