Crude Rallies on Prospects for Global Oil Supplies to Remain Tight

Aug WTI crude oil (CLQ22) this morning is up +3.95 (+4.05%), and Aug RBOB gasoline (RBQ22) is up +6.82 (+2.12%).  Aug Nymex natural gas (NGQ22) is up by +0.464 (+6.61%).

Crude oil and gasoline prices this morning are sharply higher.  A weaker dollar today is boosting energy prices along with a rally in the S&P 500 to a 1-week high, which shows confidence in the economic outlook and energy demand.  Crude prices are also climbing today on signs that Saudi Arabia will not boost its crude production to appease U.S. demands for more crude.  

Aug natural gas prices today rallied sharply for a second session and posted a new 1-month high.  Nat-gas prices are climbing today on expectations for increased demand from electricity providers to run more air-conditioning due to a heat wave engulfing most of the U.S.  Maxar Technologies said today that hotter-than-normal temperatures are forecast across the U.S. mainland from July 23-27.

Crude prices are moving higher today after President Biden left his trip from the Middle East over the weekend with no announcement of any agreement from Saudi Arabia that it would boost its crude production levels.  All OPEC+ members are still constrained by oil-production limits, and to increase output beyond current quotas would require unanimous agreement.  OPEC+ is scheduled to meet next on August 3 to discuss its production policy for September and beyond.

The political chaos in Libya is worsening the global crude supply crisis.  Libya's crude output has collapsed since mid-April after protesters forced the closure of several oil fields and ports.  Crude exports from Libya, home to Africa's largest oil reserves, dropped to a 20-month low of 610,000 bpd in June.

Lower OPEC crude production is supportive of prices.  Despite the OPEC+ agreement to raise crude oil output, OPEC crude production in June fell by -120,000 bpd to 26.6 million bpd.  Nigerian and Libyan crude output fell in June due to damaged pipelines in Nigeria and political unrest in Libya, undercutting the overall OPEC+ production 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 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.

In a bullish factor, Vortexa reported today that the amount of crude stored on tankers in the week ended July 15 that has been stationary for at least a week fell -6.3% w/w to 85.28 million bbl, the lowest in 5 months.

A jump in Covid infections around the world may lead to additional pandemic restrictions that curb economic activity and energy demand.   China reported 580 new Covid infections on Saturday, the most in 8 weeks.  Already, close to 30 million people are under some form of movement restrictions in China as the government maintains its strict Covid-Zero strategy.  The lockdowns have hurt Chinese crude demand and are bearish for prices as China June crude imports fell to a 4-year low of 8.75 million bpd.  Also, Japan reported a record 110,680 new Covid infections Saturday.  In addition, the 7-day average of new U.S. Covid infections rose to a 6-week high of 135,409 on Sunday.  

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of July 8 were -8.9% below the seasonal 5-year average, (2) gasoline inventories were -5.6% below the 5-year average, and (3) distillate inventories were -21.2% below the 5-year average.  U.S. crude oil production in the week ended July 8 fell -0.8% w/w to 12.0 million bpd, -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 July 15 rose by +2 rigs to a 2-1/4 year high of 599 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 Surge on the Outlook for Hot Temps
• Crude Gains on Dollar Weakness and Strength in Stocks
• Nat-Gas Prices Fall on Bigger-Than-Expected Build in EIA Inventories
• Crude Slumps on Dollar Strength and Recession Fears