Crude Tumbles on an Unexpected Build in Weekly EIA Inventories

July WTI crude oil (CLN22) on Wednesday closed down -3.62 (-3.04%), and July RBOB gasoline (RBN22) closed down -9.96 (-2.49%).  

Crude oil and gasoline prices Wednesday fell sharply, with crude falling to a 1-1/2 week low and gasoline dropping to a 2-1/2 week low.  Crude oil prices fell on an unexpected build in weekly EIA crude inventories.  Another bearish factor is concern that surging gasoline prices are leading to demand destruction after Wednesday's weekly EIA data showed U.S. gasoline demand last week fell to 9.09 million bpd, the lowest for that particular week since 2013, excluding the 2020 Covid year.  

A bearish factor for crude prices is concern that China’s economy will be slow to reopen from pandemic lockdowns after Beijing reported Wednesday more than 50 Covid cases for the fifth day in a row, and Shanghai said it will arrange a round of mass Covid testing every weekend until the end of July.  Shanghai had lifted its two-month lockdown on June 1 but shut down most of the city Saturday to undertake mass Covid testing.

A bullish factor for crude is Libya's sharp drop in crude output.  The country's oil minister said Monday that Libya's crude output is only 100,000 bpd, down by about -1.1 million bpd, as "almost all the oil and gas activities in the east of Libya are being shut down" due to armed government protesters.  Libya’s May crude production fell -140,000 bpd to 760,000 bpd, the smallest amount in 1-1/2 years.

Crude prices have support after EU leaders recently 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 the action by OPEC+ on June 2 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 increased and is bearish 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 10 rose by +12% w/w to 103.11 million bbl.

Wednesday's weekly EIA report was mixed for energy prices.  On the negative side, EIA crude inventories unexpectedly rose +1.96 million bbl versus expectations of a -2.2 million bbl draw.  Also, EIA distillate stockpiles unexpectedly rose +725,000 bbl versus expectations of a -500,000 bbl draw.  In addition, U.S. crude production the week of June 10 rose +0.8% w/w to 12.0 million bpd, a 2-year high.  On the bullish side, EIA gasoline supplies unexpectedly fell -710,000 bbl versus expectations of a +500,000 bbl build.   Also, crude stockpiles at Cushing, the delivery point of WTI futures, fell -826,000 bbl.

Wednesday's weekly EIA report showed that (1) U.S. crude oil inventories as of June 10 were -14.3% below the seasonal 5-year average, (2) gasoline inventories were -10.4% below the 5-year average, and (3) distillate inventories were -22.5% below the 5-year average.  U.S. crude oil production in the week ended June 10 rose +0.8% w/w to a 2-year high of 12.0 million bpd, which is -1.1 million bpd (-8.4%) 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 10 rose by +6 rigs to a 2-1/4 year high of 580 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.