Crude Prices Retreat on Dollar Strength and Energy Demand Concerns

Oct WTI crude oil (CLV22) on Thursday closed down -2.94 (-3.28%), and Oct RBOB gasoline (RBV22) closed down -4.55 (-1.87%).  

Crude and gasoline prices on Thursday fell sharply for a third day, with crude dropping to a 2-week low and gasoline sinking to a 7-1/2 month low.  A surge in the dollar (DXY00) Thursday to a 20-year high undercut most commodity prices, including crude and gasoline.  Also, concern that Chinese energy demand will falter weighed on crude prices after China today ordered the city of Chengdu, with 21 million people, locked down due to rising Covid infections.

Crude prices also remained 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.  OPEC+ will meet Monday, September 5, to discuss crude production levels.

The slump in the S&P 500 Thursday to a 6-week low undercuts confidence in the economic outlook and energy demand and is bearish for crude prices.

Weakness in the crude crack spread is bearish for oil prices as the spread dropped to a 5-1/2 month low Thursday.  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.

Wednesday'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.

• Crude Tumbles on Dollar Strength and Chinese Energy Demand Concerns
• Crude Sinks on Economic Concerns
• Crude Falls on Concern an Economic Slowdown Will Crimp Energy Demand
• Crude Slumps on Reduced Chance for an OPEC+ Production Cut