Crude Closes Moderately Higher on Dollar Weakness

Dec WTI crude oil (CLZ22) on Friday closed up +0.54 (+0.64%), and Dec RBOB gasoline (RBZ22) closed up +0.87 (+0.35%).  

Crude oil and gasoline prices Friday recovered from early losses and closed moderately higher.  A reversal in the dollar Friday sparked short-covering in crude after the dollar index (DXY00) fell back from a 3-week high and dropped to a 2-week low.  Crude prices Friday morning initially moved lower on Chinese energy demand concerns after the Chinese government locked down parts of the central city of Xi’an, confining some of the city’s 13 million people to their homes for at least a week.

Friday's monthly report from the Bundesbank was bearish for energy demand and crude prices after the Bundesbank said, “the German economy is likely on the cusp of a recession.”

A negative factor for crude was the fall in the crude crack spread Friday to a 2-1/2 week low.  The weaker crack spread discourages refiners from boosting crude purchases to refine the crude into gasoline and distillates.

A supportive factor for crude is the prediction from researcher StanChart that U.S. guidelines for refilling the Strategic Petroleum Reserve (SPR) will help set a long-term price floor of $70 a barrel for WTI crude.

A bearish factor for crude was Wednesday's announcement from President Biden that the U.S. will release 15 million bbls of crude from the SPR to balance markets and keep gasoline prices from climbing further.   President Biden also said his administration might authorize additional crude releases from the SPR if needed.

In a bearish factor, Chinese President Xi Jinping on Monday said at the China Communist Party Congress that China's strict Covid Zero policy would be maintained.  China's strict Covid lockdowns have hurt 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 reported China Aug crude processing rose just +0.9% from July and was still down -8% y/y to 12.69 million bpd.  Air travel in China during the Golden Week holiday in the first week of October was down -42% from a year earlier, and road trips by Chinese tourists during the week-long holiday were down about -30% from a year ago.  Transportation accounts for about half of oil consumption in China.

In a bearish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week rose +4.5% w/w to 90.16 million bbls in the week ended October 14.

OPEC+ on October 5 agreed to cut its collective output by -2.0 million bpd for November and December, a bigger cut than expectations of -1.0 million bpd.  Saudi Arabia's energy minister said the real-world impact of the crude production cuts would likely be around 1 million to 1.1 million bpd from November since some members are already pumping well below their quotas.  

OPEC crude production in September rose +230,000 bpd to a 2-1/2 year high of 29.89 million bpd.  An increase in crude exports from Libya is bearish for oil prices after Libya Sep crude exports jumped +25% m/m to 1.16 million bpd, a 14-month high.

Comments from Nigeria's oil minister October 5 were bullish for crude prices when he said OPEC wants crude prices around $90 per barrel and "we have to take every step to ensure prices remain" within this range.

Stronger crude demand in India, the world's third-largest crude-consuming nation, is bullish for oil prices.  India's Oil Ministry reported October 7 that India's Sep oil products consumption rose +8.1% y/y to 17.2 MMT.

Oil prices are seeing underlying 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) recently 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."

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of October 14 were -1.7% below the seasonal 5-year average, (2) gasoline inventories were -7.4% below the seasonal 5-year average, and (3) distillate inventories were -22.4% below the 5-year seasonal average.  U.S. crude oil production in the week ended October 14 rose +0.8% w/w to 12.0 million bpd, which is only -1.1 million bpd (-8.4%) below the Feb-2020 record-high of 13.1 million bpd.

Baker Hughes reported Friday that active U.S. oil rigs in the week ended October 21 rose by +2 rigs to a 2-1/2 year high of 612 rigs.  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.

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