Crude Rallies on Global Supply Crunch

July WTI crude oil (CLN22) on Wednesday closed up +2.70 (+2.26%), and July RBOB gasoline (RBN22) closed up +6.43 (+1.54%).  

Crude oil and gasoline prices Wednesday rallied moderately, with crude climbing to a 3-month high.  Forecasts for stronger Chinese demand amid tight global crude supplies are pushing oil prices higher.  Crude prices maintained their gains despite an unexpected increase in weekly EIA crude inventories.

Comments Wednesday from UAE Energy Minister Suhail Al-Mazrouei were supportive of crude prices when he said oil prices are "nowhere near" a peak yet because Chinese demand has yet to return to normal.

Comments Wednesday from OPEC Secretary-General Barkindo were bullish for crude when he said, "there is a massive investment deficit in the oil industry, which needs to be reversed urgently."  He added that OPEC has little spare production capacity, "with the exception of 2-3 members, all are maxed out."

A bullish factor for crude was Tuesday's news that gunmen stormed Libya's Sharara oil field, the country's biggest, and forced workers to stop operations.  The oil field had only just reopened Sunday after production was halted for two months when armed government protesters forced a stop in crude oil output.  As a result, Libya’s May crude production fell -140,000 bpd to 760,000 bpd, the smallest amount in 1-1/2 years.

A negative factor for energy prices was Wednesday's action by the Organization for Economic Co-operation and Development (OECD) to cut its 2022 global GDP forecast to 3.0% from a 4.5% estimate in December.

Crude prices saw support Monday when Saudi Arabia raised its oil prices to Asian buyers for July delivery by $2.10 a barrel from June, a bigger increase than expectations for a $1.50 a barrel increase.

China has eased pandemic restrictions in several regions, which should boost economic activity and energy demand as cities reopen.  The recent surge in Covid infections in China has forced the government to impose pandemic restrictions and lockdowns that have curbed economic growth and energy demand.   Recent data showed that in April, China's apparent oil demand fell -6.7% y/y to 12.09 million bpd.  Also, China Apr crude processing fell -10% y/y to a 2-year low of 51.81 MMT.

The recent surge in diesel prices to a record high has provided support for the prices of gasoline and other refined products.  The diesel crack spread Apr 28 surged to a record high (data from 1986) on depleted global diesel supplies as countries worldwide shun Russian fuel supplies and scramble to obtain diesel supplies elsewhere.

Crude prices have support after EU leaders last Thursday agreed on the sixth package of sanctions against Russia, including a partial ban on Russian crude.  The sanctions would forbid the purchase of crude oil and petroleum products from Russia delivered by sea but include a temporary exemption for pipelines.  Also, the EU's ban gives an exemption to Hungary, which would continue to receive Russian pipeline oil.

A bearish factor for crude was last Thursday's action by OPEC+ to agree to boost its crude output by 648,000 bpd in July and August, up from 432,000 bpd in recent months.

OPEC crude oil production in May rose by +130,000 bpd to a 2-year high of 28.850 million bpd.  OPEC was expected to increase output by +290,000 bpd in May, but supply constraints in Libya and Nigeria prevented OPEC from reaching that level.  

Crude oil has support from ongoing concern that Russia may use energy as a weapon against countries that imposed sanctions for its attack on Ukraine.  Russia halted natural gas shipments to Bulgaria, Denmark, Finland, the Netherlands, and Poland for failing to pay for Russian gas supplies in rubles.  Russia is trying to force its European customers to pay rubles for its oil and gas exports.

The amount of crude held worldwide in floating storage on tankers has decreased and is bullish for prices.  Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week in the week ended June 3 fell by -11% w/w to 89.31 million bbl.

Wednesday's weekly EIA data was mixed for energy prices.  On the bullish side, EIA gasoline supplies unexpectedly fell -812,000 bbl versus expectations of a +80,000 bbl build.  Also, crude stockpiles at Cushing, the delivery point of WTI futures, fell -1.59 million bbl.  On the bearish side, EIA crude inventories last week unexpectedly rose +2.03 million bbl versus expectations of a draw of -2.50 million bbl.  Also, EIA distillate supplies rose +2.59 million bbl, well above expectations of +600,000 bbl.

Wednesday's weekly EIA report showed that (1) U.S. crude oil inventories as of June 3 were -14.8% below the seasonal 5-year average, (2) gasoline inventories were -9.5% below the 5-year average, and (3) distillate inventories were -22.6% below the 5-year average.  U.S. crude oil production in the week ended June 3 was unchanged w/w at 11.9 million bpd, which is -1.2 million bpd (-9.2%) 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 June 3 were unchanged at 574 rigs, just below the 2-year high of 576 rigs from May 20.  U.S. active oil rigs have risen sharply from the 16-1/2 year low of 172 rigs since Aug 2020, signaling an increase in U.S. crude oil production capacity.