Crude Falls on Improved Prospects for an Iran Nuclear Deal

Sep WTI crude oil (CLU22) this morning is down -2.68 (-2.91%), and Sep RBOB gasoline (RBU22) is down -9.43 (-3.10%).  Sep Nymex natural gas (NGU22) is up +5.24%

Oil prices this morning are moderately lower and posted a new 6-1/2 month nearest-futures low.  Signs of progress toward a renewed nuclear deal with Iran are weighing on crude prices today.  Also, concerns that a slowdown in China's economy will curb energy demand are weighing on energy prices.

Sep nat-gas prices this morning are sharply higher and climbed to a 3-week high.  Positive carry-over from a +10% surge in European gas prices today supports U.S. nat-gas prices.  The surge in European gas prices keeps U.S. nat-gas exports running at full tilt, limiting a build of nat-gas storage ahead of the winter season.  U.S. nat-gas inventories remain tight and are down -9.9% y/y and -11.9% below their 5-year seasonal average.

Signs of progress in nuclear talks with Iran are negative for crude prices.  The European Union said today that it views Iran's response to a proposed blueprint for reviving the 2015 nuclear deal as constructive, and it is consulting with the U.S. on a "way ahead" for protracted talks.  An agreement with the U.S. over a nuclear deal could restore Iran's oil exports to global markets.  ING Bank said today that the removal of oil sanctions on Iran could see it pump an additional 1.3 million bpd of crude oil.

Weakness in Chinese crude demand is bearish for prices.  Chinese refineries in July handled the least amount of oil since March 2020 as Covid lockdowns and refinery shutdowns for maintenance have undercut crude demand.  As a result, China's apparent oil demand in July fell -9.7% y/y to 12.16 million bpd, and China's Jan-July apparent oil demand is down -4.6% y/y to 12.74 million bpd.  

Today's global economic data was mixed for energy demand and crude prices.   On the negative side, U.S. July housing starts fell -9.6% m/m to a 17-month low of 1.446 million, weaker than expectations of 1.527 million.  Also, the  German Aug ZEW survey expectations of economic growth unexpectedly fell -1.5 to a 13-year low of -55.3, weaker than expectations of an increase to -52.7.  On the positive side, U.S. July manufacturing production rose +0.7% m/m, stronger than expectations of +0.3% m/m and the biggest increase in 4 months.  

In a bearish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week jumped +20% w/w to 113.35 million bbls in the week ended August 12, the highest in 10 months.

Crude oil prices have support after OPEC+ at its meeting on August 3, said it would boost its crude production target for September by only 100,000 bpd, well below the 600,000 bpd it announced for July and August.  The markets were on guard for a possible larger increase in response to political pressure from the Biden administration.  The added production will most likely be met by Saudi Arabia and the United Arab Emirates, the only members among the 23-nation alliance that have any significant amount of excess production capacity.

OPEC+ production in July rose by +260,000 bpd to 29.050 million bpd, according to the IEA, but is still running more than 2 million bpd below quotas due to various supply disruptions and capacity constraints.  Nigerian and Libyan crude output has fallen in recent months due to damaged pipelines in Nigeria and political unrest in Libya, undercutting the overall OPEC+ production level.  Crude oil exports from Libya, home to Africa's largest oil reserves, dropped to a 20-month low of 610,000 bpd in June.  However, Libyan Oil Minister Mohammed Oun recently said that Libya's crude production should rise to 1.2 million bpd in early August as oil facilities are brought back on line.

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of August 5 were -5.2% below the seasonal 5-year average, (2) gasoline inventories were -6.4% below the 5-year average, and (3) distillate inventories were -23.6% below the 5-year average.  U.S. crude oil production in the week ended August 5 rose 100,000 bpd to a 2-1/4 year high of 12.2 million bpd, which is only -0.9 million bpd (-6.9%) 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 August 12 rose by +3 rigs to 601 rigs, which was just 4 rigs below the July 29 2-1/4 year high of 605 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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