Crude Oil Falls on a Stronger Dollar and Energy Demand Concerns

Mar WTI crude oil (CLH23) on Monday closed down -1.78 (-2.23%), and Mar RBOB gasoline (RBH23) closed down -8.77 (-3.38%).  

Crude oil and gasoline prices Monday retreated, with crude falling to a 2-week low and gasoline dropping to a 1-week low.  A stronger dollar (DXY00) Monday undercut energy prices.  Crude prices are also under pressure on concern that the actions by global central banks this week to raise interest rates will slow economic growth and energy demand.  Finally, the weakness in stocks Monday undercuts confidence in the economic outlook and is negative for energy demand and crude prices.

An unexpected contraction in the German economy last quarter shows weak energy demand and is bearish for crude prices.  Monday's news showed German Q4 GDP fell -0.2% q/q and rose +0.5% y/y, weaker than expectations of unch q/q and +0.8% y/y.

Weakness in the crude crack spread is negative for oil prices.  The crack spread Monday fell to a 2-1/2 week low, discouraging refiners from purchasing crude oil and refining it into gasoline and distillates.

Signs of strength in Chinese fuel demand support crude prices after Sinopec reported that retail gasoline sales at gas stations affiliated with Sinopec in China rose +20% over the Lunar New Year break compared to the same period last year.  Also, China's Ministry of Culture and Tourism reported that more than 300 million trips were made during the week-long Lunar New Year holiday, nearly 90% of pre-pandemic levels.

Delegates from OPEC+ said the group would maintain its crude production targets at current levels when they meet on February 1, as they await clarity on the recovery in consumption in China and the impact of sanctions on Russian crude supplies.  Goldman Sachs predicts that OPEC+ will only start to reverse its supply cuts, currently about 2 million bpd, in the second half of this year when accelerating demand will tighten the market.

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 -16% w/w to 75.20 million bbl in the week ended January 27.

Increased OPEC crude output is bearish for oil prices.  OPEC Dec crude production rose +150,000 bpd to 29.140 million bpd.  OPEC+ on December 4 decided to keep the group's crude production targets unchanged for January, in line with expectations.  OPEC+ will meet again on February 1 to discuss its production targets.

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of January 20 were +2.5% above the seasonal 5-year average, (2) gasoline inventories were -7.7% below the seasonal 5-year average, and (3) distillate inventories were -19.6% below the 5-year seasonal average.  U.S. crude oil production in the week ended January 20 was unchanged w/w at 12.2 million bpd, which is only 0.9 million bpd (-6.9%) 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 January 27 fell by -4 rigs to 609 rigs, modestly below the 2-1/2 year high of 627 rigs posted on December 2.  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 Tumbles on Dollar Strength and Energy Demand Concerns
• Crude Retreats on Dollar Strength and Technical Selling
• Crude Falls on Dollar Strength and Technical Selling
• Signs of Stronger Global Energy Demand Supports Crude Prices