Crude Plunges as an Aggressive Fed will Slow the Economy and Energy Demand

July WTI crude oil (CLN22) this morning is down -6.35 (-5.40%), and July RBOB gasoline (RBN22) is down -26.72 (-6.75%).  July Nymex natural gas (NGN22) is down -0.220 (-2.95%).

Crude oil and gasoline prices this morning sold off to 3-week lows and are sharply lower.  A stronger dollar today is undercutting energy prices.  Also, comments today from Fed Chair Powell, who said the Fed would do whatever is necessary to contain inflation, have bolstered speculation that an aggressive Fed will drive the U.S. economy into recession, which is bearish for energy demand and crude prices.

Nat-gas prices this morning are moderately lower.  The outlook for U.S. nat-gas inventories to rebuild due to reduced exports is bearish for prices.  Freeport LNG today declared force majeure on its LNG shipments loading from its fire-damage export plant until the first week of September.  Losses were contained on expectations for hot U.S. temperatures to boost nat-gas demand from electricity providers to power the increased demand for air-conditioning.  The Commodity Weather Group said today that above-normal temperatures are seen over most of the U.S. through June 26.

Today's U.S. economic data was weaker than expected and was bearish for energy demand and crude prices.  U.S. May manufacturing production unexpectedly fell -0.1% m/m, weaker than expectations of +0.3% m/m and the first decline in four months.  Also, U.S. May industrial production rose +0.2% m/m, weaker than expectations of +0.4% m/m.

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 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.

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 has already halted natural gas shipments to Demark, Finland, Bulgaria, the Netherlands, and Poland and reduced supplies to Germany for not paying for Russian gas 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 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.

• Nat-Gas Closes Higher on U.S. Heat and Soaring European LNG Prices
• Crude Falls on Concern Slowing Global Economy will Curb Energy Demand
• Nat-Gas Rallies on U.S. Heat and Surge in European LNG Prices
• Crude Oil Prices Fall on an Unexpected Build in Weekly EIA Inventories