Crude Oil Gains on a Potential Cut in OPEC+ Crude Output

Oct WTI crude oil (CLV22) on Tuesday closed up +3.38 (+3.74%), and Oct RBOB gasoline (RBV22) closed up +6.41 (+2.39%).  

Crude and gasoline prices Tuesday moved higher, with crude posting a 2-1/2 week high.  A weaker dollar Tuesday was supportive of energy prices.  Crude oil prices also had carry-over support from Monday when Saudi Arabian Oil Minister Prince Abdulaziz bin Salman said that oil-price disconnect might force OPEC+ action to tighten production.  However, crude prices fell back from their best levels on Tuesday's weaker-than-expected global economic news, suggesting weakening energy demand.

A bullish factor for crude prices was the news from Bloomberg on Monday that Saudi Arabian Oil Minister Prince Abdulaziz bin Salman said "extreme" volatility is disconnecting oil futures prices from fundamentals and that oil futures prices don't reflect the underlying fundamentals of supply and demand.  He added that the disconnect might require OPEC+ to tighten crude production when it meets next month.

Tuesday's global economic news showed weak economic activity that is bearish for energy demand and crude prices.  The U.S. Aug S&P Global manufacturing PMI fell -0.9 to a 2-year low of 51.3, weaker than expectations of 51.8.  Also, U.S. July new home sales fell -12.6% to a 6-1/2 year low of 511,000, weaker than expectations of 575,000.  The Eurozone Aug S&P Global composite PMI fell -0.7 to a 1-1/2 year low of 49.2.  Japan's Aug Jibun Bank manufacturing PMI fell -1.1 to a 1-1/2 year low of 51.0.

Weakness in the crude crack spread is negative for oil prices.  The crack spread Tuesday fell to a 2-week low, discouraging refiners from purchasing crude to refine into gasoline.

Signs of progress in nuclear talks with Iran are negative for crude oil prices.  President Biden Sunday spoke with EU leaders about "ongoing negotiations" to revive 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 Iran 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 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.

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.

Crude oil prices climbed more than +10 cents/bbl above their Tuesday afternoon closing level after the API reported that U.S. crude supplies fell -5.63 million bbl last week.  The consensus is for Wednesday's weekly EIA crude inventories to fall by -2.50 million bbl.

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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