Crude Rallies after EIA Inventories Fall More Than Expected

Sep WTI crude oil (CLU22) on Wednesday closed up +2.28 (+2.40%), and Sep RBOB gasoline (RBU22) closed up +7.18 (+2.33%).  

Crude oil and gasoline prices Wednesday posted moderate gains.  A larger-than-expected decline in weekly EIA crude oil and gasoline inventories supported energy prices on Wednesday.  Also, a rally in stocks Wednesday shows confidence in the economic outlook that supports energy demand.  In addition, Wednesday's jump in the crack spread to a 1-week high is bullish for crude prices.

Wednesday's global economic data was mixed for energy demand and crude prices.  On the positive side, U.S. June capital goods new orders nondefense ex-aircraft, a proxy for capital spending, rose +0.5% m/m, stronger than expectations of +0.2% m/m.  Conversely, U.S. June pending home sales tumbled -8.6% m/m, weaker than expectations of -1.0% m/m and the biggest decline in more than 2 years.  Also, German Aug GfK consumer confidence fell 2.9 to a record low -30.6 (data from 2005), weaker than expectations of -28.9.

An increase in the crude crack spread Wednesday to a 1-week high is supportive for crude prices as it gives incentive to refiners to boost their crude purchases and refine the crude into gasoline.

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.

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.

Wednesday's weekly EIA data was mostly bullish for energy prices.   EIA crude inventories fell -4.52 million bbl, a larger draw than expectations of -1.5 million bbl.  Also, EIA gasoline supplies fell -3.3 million bbl, a larger draw than expectations of -1.0 million bbl.  In addition, EIA distillate stockpiles fell -784,000 bbl, a bigger draw than expectations of -500,000 bbl.  On the negative side, crude supplies at Cushing, the delivery point of WTI futures, rose +751,000 bbl.  

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of July 22 were -8.6% below the seasonal 5-year average, (2) gasoline inventories were -4.6% below the 5-year average, and (3) distillate inventories were -23.1% below the 5-year average.  U.S. crude oil production in the week ended July 22 rose +1.7% w/w and matched its 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 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.
 

• Crude Oil Jumps on a Bigger-Than-Expected Drop in EIA Inventories
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• Crude Oil Tumbles on Concern About Economic Slowdown
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