Crude Falls as Weak Economic Data Sparks Recession Concerns

Sep WTI crude oil (CLU22) on Thursday closed down -0.84 (-0.86%), and Sep RBOB gasoline (RBU22) closed down -5.18 (-1.64%).  

Crude oil and gasoline prices on Thursday posted moderate losses.  Crude oil and gasoline prices were undercut Thursday by the news that U.S. Q2 GDP contracted for the second consecutive month, which meets one definition of a recession.  

Thursday's global economic data was bearish for energy demand and crude prices.  U.S Q2 GDP fell -0.9% (q/q annualized), weaker than expectations of a +0.4% increase.  Also, U.S. weekly initial unemployment claims fell -5,000 to 256,000, showing a weaker labor market than expectations of 250,000.  In addition, Eurozone July economic confidence fell -3.5 to a 17-month low of 99.0, weaker than expectations of 102.0.

The CEO of Shell Plc said Thursday that oil prices are more likely to rise than fall as the tightness in global supply outweighs any risks to demand.  He added that there's limited scope for extra oil supplies from OPEC+ or U.S. shale production, and the full effect of sanctions on Russia's oil production may not have yet been felt.

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, in response to U.S. political pressure, Saudi Arabia might prevail upon OPEC+ for a production hike.

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 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 Slightly Higher on Tight Supplies
• Crude Rallies after EIA Inventories Fall More Than Expected
• Crude Oil Jumps on a Bigger-Than-Expected Drop in EIA Inventories
• Crude Oil Falls on Economic Slowdown Concerns