Crude Plunges on Recession Concerns and Dollar Strength

Nov WTI crude oil (CLX22) this morning is down -4.41 (-5.28%), and Nov RBOB gasoline (RBX22) is down -12.82 (-5.27%).  Oct Nymex natural gas (NGV22) is down by -0.267 (-3.77%).

Crude oil and gasoline prices this morning have sold off sharply, with crude plunging to an 8-month low and gasoline falling to a 2-week low.  A rally in the dollar index today to a new 20-year high is undercutting energy prices.  Also, the energy markets are worried about a global recession due to the sharp increase in global interest rates.  In addition, a slump in global equity markets today has curbed confidence in the economic outlook that is bearish for energy demand.

Oct nat-gas tumbled to a 2-1/4 month low today as forecasts for milder U.S. temperatures that would reduce nat-gas demand from electricity providers to run air-conditioning.  Forecaster Atmospheric G2 said today that cooler-than-normal temperatures are expected for the U.S. Northeast and Southeast from September 28-October 2.  Also, predominantly mild temperatures are expected across the U.S. from October 3-7.

Concern that aggressive tightening by global central banks will slow economic growth and energy demand is bearish for crude prices.  The FOMC Wednesday raised the federal funds target range by 75 bp, and the Swiss National Bank (SNB) raised rates by 75 bp on Thursday.  Also, the Bank of England (BOE) and Bank of Norway Thursday raised rates by 50 bp.

Crude oil prices had some support from Wednesday when Russian President Putin vowed to step up his war against Ukraine, raising the threat of more oil and gas supply disruptions.  

Comments Thursday from Nigeria's oil minister were supportive of crude prices when he said OPEC+ might be "forced" to make additional crude production cuts if crude prices fall below current levels.

A slump in U.S. fuel demand is bearish for crude prices.  The U.S. four-week average of distillate supplied, a measure of diesel demand, fell in the week ended September 16 below 2020 levels for a second week.  Also, U.S. gasoline demand sank after the four-week average of U.S. gasoline demand fell to the lowest seasonal level since 1997.

Weakness in global air travel has curbed jet fuel demand and is bearish for crude prices.  The global number of flights tacked by Flightradar24 dropped -5.4% m/m in the month to September 19 and was -16% lower than the equivalent of 2019 before the pandemic.

Crude oil prices have support as China eases some of its pandemic restrictions.  China last Wednesday announced it is easing pandemic lockdowns in Chengdu, a city of 21 million people, which should boost economic activity and energy demand.  China's Covid lockdowns have hurt Chinese energy demand in recent months.  Chinese refineries in July handled the least amount of oil since March 2020 as Covid lockdowns and refinery shutdowns for maintenance undercut crude demand.  Also, current crude demand remains weak as China's Bureau of Statistics today reported China Aug crude processing rose just +0.9% from July and was still down -8% y/y to 12.69 million bpd.

Oil prices are seeing support from the dim prospects for a nuclear deal with Iran that would lift sanctions against Iran and allow its crude back onto the global markets.  The International Atomic Energy Agency (IAEA) last Monday said that "the information gap is bigger and bigger" on Iran's recent nuclear activities.  Also, the European Union's chief negotiator recently said that "in light of Iran's failure to conclude the agreement on the table, we will consult with our international partners on how best to deal with Iran's continued nuclear escalation."

Crude oil prices garnered support after OPEC+ on September 5 agreed to cut its crude production level by 100,000 bpd in October, its first cut in production in more than a year.  Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said, "the simple tweak in production shows that OPEC+ will be attentive, preemptive and pro-active" in managing crude markets.  OPEC+ production in August rose by +590,000 bpd to a 2-1/4 year high of 29.640 million bpd, according to the IEA, but is still running more than 2 million bpd below quotas due to various supply disruptions and capacity constraints.  Nigerian and Libyan crude output has fallen in recent months due to damaged pipelines in Nigeria and political unrest in Libya, undercutting the overall OPEC+ production level.  Libya's state-run National Oil Corp said September 6 that Libyan crude production had dropped more than -100,000 bbl to 1.1 million bpd, down from the 1.226 million bpd it produced the previous week.

In a bullish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week fell -7.3% w/w to 85.67 million bbls in the week ended September 16.

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of September 16 were -2.0% below the seasonal 5-year average, (2) gasoline inventories were -5.0% below the seasonal 5-year average, and (3) distillate inventories were -19.4% below the 5-year seasonal average.  U.S. crude oil production in the week ended September 16 was unchanged at 12.1 million bpd, which is only -1.0 million bpd (-7.6%) below the Feb-2020 record-high of 13.1 million bpd.

Baker Hughes reported last Friday that active U.S. oil rigs in the week ended September 16 rose by +8 rigs to 599 rigs, modestly below the 2-1/4 year high of 605 rigs posted in the week ended July 29.  U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signaling an increase in U.S. crude oil production capacity.
 

• Crude Oil Moderately Higher on Global Supply Concerns
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