Crude Rallies on Tight Global Oil Supplies

Aug WTI crude oil (CLQ22) on Friday closed up +2.67 (+2.52%), and Aug RBOB gasoline (RBQ22) closed up +15.15 (+4.28%).  

Crude oil and gasoline prices Friday moved moderately higher on global supply concerns due to export disruptions in Libya.  Also, crude prices rose on expectations for a record amount of U.S. drivers to take the road this July 4 holiday weekend.  Crude pushed higher Friday despite a rally in the dollar index to a 2-week high and weaker-than-expected U.S. economic data on May construction spending and Jun ISM manufacturing activity.

A bullish factor for crude is reduced crude supplies from Libya after the country's state oil company Wednesday said it suspended crude exports from two of its ports, declaring force majeure at Es Sider and Ras Lanuf, Libya's largest and third-biggest crude export terminals.  On Monday, Libya said that it might suspend crude exports and declare force majeure for crude from the Gulf of Sirte, which contains many of the country's oil export terminals, amid a worsening political crisis.  Almost all oil and gas activities in the east of Libya are being shut down" due to armed government protesters.  As a result, Libya’s June crude exports have declined over the past four months to a 20-month low of 610,000 bpd in June.

A supportive factor for crude is the outlook for U.S. gasoline demand to increase this July 4 holiday weekend.  The American Automobile Association (AAA) projects that 42 million U.S. drivers will travel by automobile more than 50 miles this weekend, exceeding 2019 levels by 500,000.

Lower OPEC crude production is supportive of prices.  Despite OPEC+ agreeing to an increase in crude output for July, OPEC July crude production fell for a second month as output fell -120,000 bpd to 26.6 million bpd.  Reduced Nigerian and Libyan crude output led to losses in OPEC production in June as damaged pipelines in Nigeria and political unrest in Libya curbed crude output.

Weaker-than-expected U.S. economic data Friday signals a slowdown in the economy that is bearish for crude demand and prices.  The U.S. Jun ISM manufacturing index fell -3.1 to 53.0, weaker than expectations of 54.5 and the slowest pace of expansion in 2 years.  Also, May construction spending unexpectedly fell -0.1% m/m, weaker than expectations of +0.4% m/m and the first decline in 8 months.

Crude prices fell sharply Thursday after President Biden said he would ask for more crude production from the broader Gulf Cooperation Council forum, a gathering of oil-rich countries along the Persian Gulf, instead of asking Saudi Arabia to boost crude production when he travels there July 16 directly.  Saudi Arabia and the United Arab Emirates are the only two members with the capacity to boost crude output meaningfully.

OPEC+ on Thursday ratified plans to hike crude output by 648,000 bpd in August, restoring the final tranche of the 9.7 million bpd that was shuttered two years ago.  The decision is largely symbolic, however, with most OPEC+ countries unable to boost their output due to capacity constraints.

A supportive factor for crude oil prices is the reopening of China's economy after the recent pandemic lockdowns.  Beijing and Shanghai are slowly reopening their economies as the pace of new Covid infections eases, which should spark a pickup in economic activity and energy demand.

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 fell last week, a bullish factor for crude 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 24 fell -15% w/w to 90.96 million bbl.

The outlook for a resumption of nuclear talks with Iran that could lead to the lifting of restrictions on Iranian crude exports is bearish for prices.  On Monday, Iran's Foreign Ministry said that talks to revive the 2015 nuclear deal with world powers would resume this week.

Wednesday's weekly EIA report showed that (1) U.S. crude oil inventories as of June 24 were -13.3% below the seasonal 5-year average, (2) gasoline inventories were -8.4% below the 5-year average, and (3) distillate inventories were -20.6% below the 5-year average.  U.S. crude oil production in the week ended June 24 rose +0.8% w/w to a 2-year high of 12.1 million bpd, which is -1.0 million bpd (-7.6%) 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 July 1 rose by +1 rig to a 2-1/4 year high of 595 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.

• Crude Rallies on Global Supply Concerns
• Crude Falls as a Slowing Economy Curbs Energy Demand
• Crude Sinks as President Biden Will Ask Persian Gulf Allies for More Crude
• Crude Prices Retreat as U.S. Gasoline Demand Falters