Crude Moderately Lower on Demand Concerns and Possible Iran Nuclear Deal

Sep WTI crude oil (CLU22) on Monday closed down -0.54 (-0.59%), and Sep RBOB gasoline (RBU22) closed down -12.63 (-4.19%).  

Crude and gasoline prices on Monday moved lower, with gasoline prices falling sharply to a 3-week low.  Concerns that rising interest rates worldwide will cause a global recession that decimates energy demand weighed on crude prices Monday.  Also, speculation that Iranian crude supplies could soon hit the global market is undercutting crude prices.  Finally, a rally in the dollar index (DXY00) to a 5-week high Monday was bearish for energy prices.  Crude prices recovered sharply from their worst levels Monday after Saudi Arabian Oil Minister Prince Abdulaziz bin Salman said oil futures price disconnect might force OPEC+ action to tighten production.

A sharp selloff in stocks undercuts confidence in the economic outlook that is negative for energy demand and bearish for crude prices after the S&P 500 Monday sold off to a 1-1/2 week low.

Signs of progress in nuclear talks with Iran are negative for crude prices.  President Biden Sunday spoke with EU leaders about "ongoing negotiations" reviving a nuclear deal with Iran, which could lead to the removal of oil sanctions on Iran and allow Iranian crude back into the global market.  The European Union said last Tuesday that it views Iran's response to a proposed blueprint for reviving the 2015 nuclear deal as constructive.   ING Bank said last Friday that the removal of oil sanctions on Iran could see it pump an additional 1.3 million bpd of crude oil.

A supportive factor for crude prices was a Bloomberg report Monday that stated Saudi Arabian Oil Minister Prince Abdulaziz bin Salman said oil futures prices don't reflect the underlying fundamentals of supply and demand, which may require OPEC+ to tighten crude production when it meets next month.

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 bullish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week fell -5.6% w/w to 105.38 million bbls in the week ended August 19.

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 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 19 were unchanged at 601 rigs, which is 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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