OIL FUTURES: Crude rally extends as market eyes tighter supply, demand balances

Crude prices settled higher Jan. 6, as the market clawed back overnight declines amid a focus on tightened supply and demand balances heading into 2022.

NYMEX February WTI settled $1.61 higher at $79.46/b and ICE March Brent climbed $1.19 to $81.99/b.

Oil prices continue to see support from an increasingly tight outlook for global supply balances in the coming months, even as the coronavirus omicron variant weighs on near-term demand and the OPEC+ group continues to boost output.

"A growing supply risk premium helps to explain the resilience in oil prices, despite the risk-off trading regime sparked by the hawkish Fed minutes," TD Securities analysts said in a note. "While we have argued that the omicron variant's higher transmissibility will be more highly correlated with mobility restrictions than its severity, we reiterate that rising geopolitical and operational risks are driving prices higher, despite OPEC+ agreement to raise output by 400[,000 b/d] next month."

NYMEX February RBOB moved 1.22 cents higher to $2.3043/gal and February ULSD finished up 3.16 cents at $2.4777/gal.

With the OPEC+ group expected to continue to raise output as planned in coming months, modest stock builds in early 2022, according to S&P Global Platts Analytics. But diminishing spare capacity will create an uncomfortably thin market buffer in the second half of the year, they added.

Meanwhile, growing instability in Libya and Kazakhstan could disrupt near-term global supply.

Kazakhstan, a non-OPEC producer participating in the OPEC+ output agreement, currently producing 1.6 million b/d, has been thrust into turmoil as security forces engage in violent clashes with demonstrators protesting high fuel costs.

The operator of Kazakhstan's highest-producing oil field, Tengiz, said Jan. 6 that a logistics issue had caused it to adjust production levels as political protests continue at the site, which is the biggest source of the CPC crude export blend.

Libyan crude output is poised to fall to a 14-month low this week because of a blockade at its key western oil fields along with pipeline maintenance at the eastern Waha oil fields.

The North African producer is pumping around 700,000 b/d at the moment, Libya-based sources told S&P Global Platts Jan. 4, a fall of around 500,000 b/d from mid-December.

On Jan. 3. state-owned National Oil Corp. said pipeline that connects the Samah and Dahra fields to the 350,000 b/d Es Sider terminal will be shut for repairs, causing a production fall of around 200,000 b/d.

Tightened supply and demand outlooks supported the energy complex even as broader financial and commodity markets were roiled by an unexpectedly hawkish pivot by the US Federal Reserve. Minutes of a December Federal Open Market Committee meeting released Jan. 5 showed policy members leaning toward raising interest rates sooner than expected, while also shrinking the Fed's massive balance sheet at a faster pace than in the past.

"Markets were rocked by a hawkish FOMC minutes overnight after the Fed indicated they may raise their key rate earlier than previously anticipated. Asian markets may face a tumultuous trading session on the back of hawkish FOMC minutes," said OCBC Treasury Research analysts in a Jan. 6 note.

"The combined effect of a shrinking balance sheet and aggressive rate hikes may have driven worries on some capping of economic momentum ahead, largely reflected in the flattening of the yield curve overnight," IG market strategist Yeap Jun Rong said in a note also dated Jan. 6.