US CPI Weighs on Oil Demand

Crude oil (CL) prices fell more than 4% to a 6-month low on Tuesday, December 12, a fresh June low, depreciating to $68.27 per barrel due to rising inflation concerns following the US CPI release. According to the inflation data, energy prices fell 2.3% in November, with gasoline (RB) down 6% and fuel oil 2.7%.

The decline came despite US crude oil inventories falling more than expected on Tuesday. The API report actually showed that gasoline inventories rose 5.8 million barrels. Gasoline stock increases have been known to weigh on oil prices as they elevate worries about overall fuel demand.  

CPI and API Shift Oil Price?

Oil prices fell following the latest US inflation data, showing a slight uptick in month-on-month inflation. 

The US monthly CPI inched ten basis points higher, beating expectations of stagnancy. However, annual CPI growth slid to 3.1%, matching analyst expectations. The surprise uptick improved expectations that the Federal Reserve (FED) is unlikely to cut interest rates in the near term, raising concerns over the outlook for oil demand. 

Lower energy costs helped keep headline inflation in check, with energy prices declining 2.3% month-over-month and 5.4% year-on-year. Although markets are pricing in rate cuts starting in March, some economists believe stubborn core inflation (excluding food and energy) may delay them. A more hawkish stance from the Fed would be seen as weighing on oil prices. 

The American Petroleum Institute (API) report may have also impacted crude oil prices. The API report showed that crude oil inventories fell by 2.3 million barrels for the week ending December 8. Although this was more than analysts' expectations, gasoline inventories rose a staggering 5.8 million barrels. 

Moreover, the Energy Information Agency (EIA) recently revised its forecast for Brent crude (EB) for 2024 from $93 per barrel to $83 per barrel. The agency cited "ongoing concerns around global oil demand growth" and higher expected crude oil supply from the US. However, it expects OPEC+ to lower crude oil production by 600,000 barrels per day in 2024, which may partially offset non-OPEC+ supply growth. 

Is There Backing For Crude Prices?

For one, the US government had pledged to purchase oil to refill its Strategic Petroleum Reserve (SPR) when prices reached around $70. The SPR currently holds around 389 million barrels of oil, below its 700 million barrel capacity. In fact, the US Department of Energy (DOE) plans to buy 3 million barrels of oil for delivery in March to fulfill its obligation. However, the Biden Administration later revised the price to $79 per barrel, suggesting it has started the refill process.

Second, OPEC+ agreed to cut oil output by 2.2 million barrels per day from January for another three months. However, this may offer little time to impact physical supply soon. Conversely, some analysts see a bearish outlook for oil prices, arguing that OPEC's short-term production cuts may have little impact on rebalancing the market unless extended further. This leaves forward demand and supply dynamics depending largely on monthly revisions OPEC is expected to announce.

Finally, and in the shorter time span, the American Automotive Association (AAA) expects this holiday travel period from December 23 to December 28 to be the busiest ever for airports, forecasting a record 7.5 million air travelers. The demand for air travel is expected to support oil prices, especially since both gas and oil prices have allowed cheaper airfare.

Outlook For Oil in 2024

While OPEC has pledged to cut oil production by 2.2 million barrels per day, some analysts remain sceptical that this will offset weakening demand. Compliance between OPEC members has been an issue, with a few dissenters not following through with production cuts. But China's latest economic data showed deflationary pressures and weak domestic demand.  This points to a weak near-term outlook for oil due to expected cuts from OPEC+ and a potential drag of a restrictive monetary policy environment. 

In addition, overall oil demand in China is expected to slow in 2024 after a boost in 2023. Estimates see an increase of around 500 thousand barrels per day, less than a third of 2023’s increase.  Moreover, China's oil imports fell 9.2% in November year-on-year amid high inventories, weak economic data, and waning demand from independent refiners. Refiners' total feedstock imports, including crude oil, fuel oil, and bitumen blends, fell 12.2% month-on-month in November. 

With crude imports for January also expected to see a slowdown due to a lack of buying interest and falling crude differentials, some refiners will have to wait for February with the hope that prices fall more. (Source: Reuters)

Meanwhile, the US has become the largest oil producer in the world, producing 3 million barrels per day.

Wrap Up

In light of recent market dynamics influencing the oil market, current uncertainties call for a balanced approach to expectations. While some factors may provide temporary support, crude oil prices could be harder to navigate over the near term due to doubt about monetary policy, production cuts, and China's economic headwinds.