Crude Climbs on Signs of Firm U.S. Energy Demand

Sep WTI crude oil (CLU22) on Thursday closed up +2.39 (+2.71%), and Sep RBOB gasoline (RBU22) closed up +9.16 (+3.12%).  

Oil prices on Thursday rallied moderately.  Crude moved higher on positive carry-over from Wednesday's weekly EIA report that showed U.S. crude and gasoline inventories fell more than expected.  The upside in energy prices was limited today by a stronger dollar as the dollar index (DXY00) rallied to a 1-month high.

Thursday's U.S. economic data was mixed for crude demand and prices.  On the bullish side,  weekly initial unemployment claims unexpectedly fell -2,000 to 250,000, showing a stronger labor market than expectations of an increase to 264,000.  Also, the Aug Philadelphia Fed business outlook survey rose +18.5 to a 4-month high of 6.2, stronger than expectations of -5.0.  On the negative side, July existing home sales fell -5.9% m/m to a 2-year low of 4.81 million, weaker than expectations of 4.86 million.

U.S. gasoline demand concerns have temporarily receded after the EIA reported Wednesday that the four-week average of U.S. gasoline supplies, a proxy for consumption, rose to nearly 9.1 million bpd last week, the highest level this year.

Strength in the crude crack spread is bullish for crude prices after the crack spread rose to a 5-week high Thursday.  A higher crack spread encourages refiners to boost purchases of crude oil to refine into gasoline.

A bearish factor for crude prices was Thursday's action by Nomura to cut its 2022 China GDP forecast to 2.8% from 3.3%, which is bearish for energy demand and prices.

Strong foreign demand for U.S. crude supplies is supportive for prices after U.S. crude exports in the week ended Aug 12 rose to a record of +5.0 million bpd as Europe boosts its imports of U.S. crude to replace Russian oil.

Signs of progress in nuclear talks with Iran are negative for crude prices.  The European Union said Tuesday 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.  

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.

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of August 12 were -6.6% below the seasonal 5-year average, (2) gasoline inventories were -8.0% below the 5-year average, and (3) distillate inventories were -23.2% below the 5-year average.  U.S. crude oil production in the week ended August 12 fell -100,000 bpd to 12.1 million bpd, which is only -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 August 12 rose by +3 rigs to 601 rigs, which was just four rigs below the July 29th 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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