Crude Oil Falls on Economic Slowdown Concerns

Sep WTI crude oil (CLU22) on Tuesday closed down -1.72 (-1.78%), and Sep RBOB gasoline (RBU22) closed down -3.45 (-1.11%).  

Crude oil and gasoline prices Tuesday gave up an early advance and fairly sharp losses.  A stronger dollar Tuesday weighed on energy prices.  Also, crude prices retreated on signs that higher inflation is curbing consumer spending, which is negative for economic growth and energy demand.  Crude prices extended their losses on Tuesday's weaker-than-expected U.S. economic data.

A selloff in retailer stocks Tuesday, led by an -8% plunge in Walmart, weighed on crude prices after Walmart cut its profit outlook for the year, citing higher prices that are hurting consumer spending.

Tuesday's weaker-than-expected U.S. economic data was bearish for energy demand and crude prices.  The Conference Board's U.S. July consumer confidence index fell -2.7 to a 17-month low of 95.7, weaker than expectations of 97.0.  Also, June new home sales fell -8.1% m/m to a 2-year low of 590,000, weaker than expectations of  655,000.

An increase in crude production from Libya is bearish for crude prices.  Libyan Oil Minister Mohammed Oun said Monday that Libya's crude production has risen to above 1.0 million bpd and will reach 1.2 million bpd in early August.  Libya's crude output in April collapsed after protesters forced the closure of several oil fields and ports.  As a result, crude exports from Libya, home to Africa's largest oil reserves, dropped to a 20-month low of 610,000 bpd in June.

A bearish factor for crude was Tuesday's action by the International Monetary Fund (IMF) to cut its global 2022 GDP forecast to 3.2% from a 3.6% estimate in April.

A supportive factor for crude was Tuesday's action by the Japanese government to raise its monthly economic assessment in July for the first time in three months, saying the economy is picking up moderately as consumption picked up despite a surge in Covid cases.

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 22 that has been stationary for at least a week fell -1.9% w/w to 83.24 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.  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.

The consensus is for Wednesday's weekly EIA crude inventories to fall -1.5 million bbl.

Last 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 22 were unchanged at 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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