Crude Surges on the Prospects of Chinese Stimulus

Aug WTI crude oil (CLQ22) this morning is up +5.66 (+5.74%), and Aug RBOB gasoline (RBQ22) is up +24.59 (+7.60%).  Aug Nymex natural gas (NGQ22) is up +7.01 (+12.72%).

Crude oil and gasoline prices this morning are sharply higher.  A weaker dollar today is supportive for energy prices along with the prospects of increased China stimulus, which would be supportive of economic growth and energy demand.  Crude prices maintained sharp gains after this morning's mixed EIA inventory report.

Nat-gas prices this morning rallied sharply on a smaller than expected build in weekly EIA nat-gas inventories.  The EIA reported today that nat-gas inventories rose +60 bcf last week, well below the consensus of +75 bcf.  Nat-gas prices are also seeing support from the outlook for hotter U.S. temperatures that will boost nat-gas demand from electricity providers to fuel increased air-conditioning.  The Commodity Weather Group said today that forecasts have turned hotter for the upper Midwest to Northeast from July 17-21.  

Increased stimulus from China is supportive for crude prices after China's Ministry of Finance said today that it was considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of special bonds this year to finance infrastructure spending.

A positive factor for crude was Tuesday'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 on damaged pipelines in Nigeria and political unrest in Libya.

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 forcing its European customers to pay rubles for its oil and gas exports.

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

Citigroup warned Tuesday 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.

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.

Today's weekly EIA report was mixed for crude prices.  On the bullish side, weekly EIA gasoline supplies fell -2.50 million bbl, a bigger draw than expectations of -1.05 million bbl.  Also, EIA distillate stockpiles unexpectedly fell -1.27 million bbl versus expectations of +1.0 million bbl.  On the bearish side, EIA crude inventories unexpectedly jumped +8.23 million bbl versus expectations of -1.55 million bbl.  Also, crude supplies at Cushing, the delivery point of WTI futures, rose +69,000 bbl.  

Today's EIA report showed that (1) U.S. crude oil inventories as of July 1 were -10.8% below the seasonal 5-year average, (2) gasoline inventories were -9.1% below the 5-year average, and (3) distillate inventories were -21.3% below the 5-year average.  U.S. crude oil production in the week ended July 1 was unchanged at a 2-year high of 12.1 million bpd, -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.

• Nat-Gas Prices Fall on Mixed U.S. Weather Outlook
• Crude Sinks on Dollar Strength and Recession Concerns
• Nat-Gas Prices Retreat on Forecasts for Cooler U.S. Temps
• Crude Plunges on Dollar Strength and Recession Concerns