Crude Plunges on Dollar Strength and Recession Concerns

Aug WTI crude oil (CLQ22) this morning is down -9.21 (-8.49%), and Aug RBOB gasoline (RBQ22) closed down -30.99 (-8.40%).  Aug Nymex natural gas (NGQ22) is down -0.241 (-4.21%).

Crude oil and gasoline prices this morning are sharply lower, with crude falling to an 8-week low and gasoline dropping to a 2-month low.  Today's surge in the dollar index (DXY00) to a 20-year high is hammering most commodity prices.  Also, signs of a deteriorating economic outlook are bearish for energy demand and are fueling fund selling of crude oil and energy products.  

Nat-gas prices this morning tumbled to a 3-month nearest-futures low.   A milder U.S. weather outlook that will curb air-conditioning usage is weighing on nat-gas prices today.   Maxar Technologies said today that below-normal temperatures are expected on the East Coast from July 10-14.  Also, nat-gas prices are falling due to the prolonged outage at the Freeport LNG export terminal, which threatens to curb U.S nat-gas exports and boost domestic supplies.  Finally, a rally today in the dollar index to a 20-year high is bearish for nat-gas prices.

Concern that China could reimpose pandemic lockdowns is bearish for energy demand and prices after Shanghai launched mass testing for Covid in nine districts when new infections were found there the past two days.  Also, China reported 66 new Covid infections in Jiangsu province today, the second-biggest province for China's economic output.

Citigroup warned today that crude prices could collapse to $65 a barrel by the end of this year and tumble to $45 a barrel by the end of 2023 if a demand-crippling recession hits.

A supportive factor for crude is today's action by Saudi Arabia to boost its price of crude for Asian customers by $2.80 a barrel for August delivery, a sign of strong demand.

A bullish factor for crude is reduced crude supplies from Libya after the country's state oil company last 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.  Last 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.

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.

OPEC+ last 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.

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 increased last week, a bearish 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 July 1 rose +1.2% w/w to 92.51 million bbl.

Last 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 last 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.

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