Crude Slumps On Reduced Chance For An OPEC+ Production Cut

Crude Slumps On Reduced Chance For An OPEC+ Production Cut

Oct WTI crude oil (CLV22) on Tuesday closed down -5.37 (-5.54%), and Oct RBOB gasoline (RBV22) closed down -18.58 (-6.84%).  

Crude and gasoline prices Tuesday sold off sharply, with gasoline falling to a 3-week low.  Reduced concern about a cut in OPEC+ crude production weighed on oil prices Tuesday.  Also, Tuesday’s slump in the S&P 500 to a 1-month low curbs confidence in the economic outlook that is bearish for energy demand.

Crude prices retreated Tuesday after 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 Tuesday.  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.

Crude prices fell slightly from their Tuesday afternoon closing level after the API reported that U.S. crude supplies rose +593,000 bbl last week.  The consensus is that Wednesday’s weekly EIA crude inventories will fall by -950,000 bbl.

Last Wednesday’s EIA report showed that (1) U.S. crude oil inventories as of August 19 were -6.6% below the seasonal 5-year average, (2) gasoline inventories were -7.9% below the seasonal -year average, and (3) distillate inventories were -23.9% below the 5-year seasonal average.  U.S. crude oil production in the week ended August 19 fell -100,000 bpd to 12.0 million bpd, which is only -1.1 million bpd (-8.4%) 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.


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