Crude Falls on Concern an Economic Slowdown Will Crimp Energy Demand

Oct WTI crude oil (CLV22) this morning is down -0.93 (-1.01%), and Oct RBOB gasoline (RBV22) is down -5.18 (-2.05%).  Oct Nymex natural gas (NGV22) is down -0.025 (-0.28%).  

Crude and gasoline prices this morning extended Tuesday's sharp losses, with crude dropping to a 1-week low and gasoline falling to a 5-1/2 month low.  Concern that a slowdown in the U.S economy will crimp energy demand is undercutting crude prices after today's economic news showed the U.S. Aug ADP employment change posted its smallest increase in 19 months.  Crude prices recovered from their worst levels after weekly EIA crude inventories fell more than expected.  

Oct nat-gas this morning fell to a 2-week low on negative carry-over from a -7% plunge in European nat-gas prices to a 1-1/2 week low.  Also, forecasts for near-normal temperatures in the U.S. next week except for the West weigh on prices.  Normal temperatures will reduce nat-gas demand from electricity providers to power increased air-conditioning usage.

Crude prices remain under pressure from Tuesday when Tass reported that OPEC+ is currently not discussing a potential cut in crude production.  Crude prices rallied last week when Saudi Arabia raised the possibility that OPEC+ might need to restrict supply due to a disconnect in oil futures prices.  

Weakness in the crude crack spread is bearish for oil prices as the spread dropped to a 5-1/2 month low today.  The weaker spread discourages refiners from purchasing crude oil to refine into gasoline.

A supportive factor for crude was weekend comments from Iran that said that talks with the U.S. about reviving a nuclear deal will drag on into next month, curbing speculation that an imminent agreement would lift sanctions against Iran and allow Iranian oil exports onto the global market.  

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 -7.8% w/w to 100.70 million bbls in the week ended August 26.

Reduced 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.  

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 online.

Today's EIA report was mixed for crude prices.  On the negative side, EIA distillate stockpiles unexpectedly rose +112,000 bbl versus expectations of a -750,000 bbl decline.  On the positive side, EIA crude inventories fell -3.33 million bbl, a larger draw than expectations of -950,000 bbl.  Also, EIA gasoline supplies fell-1.17 million bbl to a 9-month low, a larger draw than expectations of -1.0 million bbl.  In addition, crude supplies at Cushing, the delivery point of WTI futures, fell -523,000 bbl.  

Today's EIA report showed that (1) U.S. crude oil inventories as of August 26 were -6.3% below the seasonal 5-year average, (2) gasoline inventories were -7.5% below the seasonal -year average, and (3) distillate inventories were -23.8% below the 5-year seasonal average.  U.S. crude oil production in the week ended August 26 rose +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 25 rose by +4 rigs and matched 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.

• Nat-Gas Prices Sink on Lower European Gas Prices and Mixed U.S. Weather
• Crude Tumbles as the Potential for an OPEC+ Production Cut Eases
• Nat-Gas Prices Rise on Forecasts for Hot U.S. Temps
• Crude Prices Climb on Tightness in Global Supplies