Crude Prices Fall on Demand Concerns and Ramped-Up Output in Libya

Sep WTI crude oil (CLU22) this morning is down -3.65 (-3.65%), and Sep RBOB gasoline (RBU22) is down -15.33 (-4.89%).  Aug Nymex natural gas (NGQ22) is down by -0.063 (-0.79%).

Crude oil and gasoline prices this morning are sharply lower, with gasoline falling to a 3-1/4 month low.  Weaker-than-expected U.S. economic data today signals a slowdown in the economy that is bearish for crude demand and prices.  Crude is also under pressure today after Libya said it is restoring its crude production.

Aug natural gas prices this morning fell back from a 1-month high and are moderately lower.  Nat-gas prices today gave up an early advance and tuned lower after an updated weather forecast from the Commodity Weather Group called for the current heat wave to fade somewhat next week.  However, losses in nat-gas were limited after weekly EIA nat-gas inventories rose +32 bcf, below expectations of +43 bcf.

U.S. economic data today was weaker than expected and bearish for economic growth prospects and energy demand.  U.S. weekly initial unemployment claims unexpectedly rose +7,000 to an 8-month high of 251,000, showing a weaker labor market than expectations of a decline to 240,000.  Also, the  July Philadelphia Fed business outlook survey unexpectedly fell -9.0 to -12.3, weaker than expectations of an increase to 0.8 and the steepest pace of contraction in 2 years.  In addition, June leading indicators fell -0.8% m/m, weaker than expectations of -0.6% m/m and the biggest decline in 2 years.

An increase in crude production from Libya is bearish for crude prices.  Libyan Oil Minister Mohammed Oun said today that Libya's crude production now stands at 700,000 bpd and will climb to 1.2 million bpd in a week to 10 days.  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.

The action by the BOJ today to cut its growth estimate for Japan is bearish for energy demand and prices as the BOJ cut its Japan 2022 GDP forecast to +2.4% from a previous forecast of +2.9%.

A slump in the crude crack spread is bearish for oil prices.  The crack spread fell to a 3-1/2 month low today, discouraging refiners from purchasing crude to refine into gasoline.

The markets are waiting to see if OPEC+ will boost production beyond expected amounts at its upcoming meeting on August 3 in response to President Biden's recent trip to Saudi Arabia.  Oil-production limits still constrain all OPEC+ members, and an increase in output beyond current quotas would require unanimous agreement.  However, Saudi Arabia might prevail upon OPEC+ for a production hike in response to U.S. political pressure.

Lower OPEC crude production is supportive of oil 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 935 new Covid infections on Tuesday, 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.  

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of July 15 were -8.3% below the seasonal 5-year average, (2) gasoline inventories were -3.6% below the 5-year average, and (3) distillate inventories were -22.7% below the 5-year average.  U.S. crude oil production in the week ended July 15 fell -0.8% w/w to 11.9 million bpd, -1.2 million bpd (-9.2%) 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.

• Crude Posts Moderate Losses on Dollar Strength and Mixed EIA Report
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• Crude Recovers Early Losses on Dollar Weakness and Strength in Stocks
• Crude Falls Back on Expectations OPEC+ Will Announce an Increase in Output