Crude Recovers Early Losses on Dollar Weakness and Strength in Stocks

Aug WTI crude oil (CLQ22) on Tuesday closed up +1.62 (+1.58%), and Aug RBOB gasoline (RBQ22) closed up +4.32 (+1.32%).  

Crude oil and gasoline prices on Tuesday recovered from early losses and posted moderate gains, with crude climbing to a 1-week high.  A weaker dollar Tuesday was bullish for energy prices, as was a rally in the S&P 500 to a 3-week high, which shows confidence in the economic outlook and energy demand.  Crude prices Tuesday initially moved lower on speculation that OPEC+ at its next meeting will announce an increase in its crude output.  Also, a decline in the crack spread to a 2-3/4 month low Tuesday was bearish for crude prices.

A bearish factor for crude was the statement from RBC Capital Markets: "We anticipate an announcement of more barrels of crude from Saudi Arabia and the remaining handful of producers with spare capacity at the next OPEC meeting."  RBC added that the incremental increase in crude output will probably be "in the range of the previous monthly increases for September."

Crude prices surged +5% Monday 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.  However, OPEC+ is scheduled to meet next on August 3 to discuss its production policy for September and beyond and could announce an incremental production hike at that meeting sparked by a Saudi response to President Biden's pressure.

Another negative factor for crude Tuesday was the decline in the crude crack spread to a 2-3/4 month low.  The lower crack spread discourages refiners from purchasing crude oil to refine into gasoline.

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 Monday 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 rise in Covid infections worldwide may lead to additional pandemic restrictions that curb economic activity and energy demand.  China reported 699 new Covid infections on Monday, the most in 8 weeks.  Already, nearly 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 5-month high of 136,234 on Sunday.  

Crude prices fell more than -40 cents/bbl from their Tuesday afternoon closing level after the API reported that U.S. crude supplies rose +1.86 million bbl last week.  The consensus is that Wednesday's weekly EIA crude inventories will climb +2.0 million bbl.

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.

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