March WTI crude oil (CLH24) on Wednesday closed up +0.72 (+0.97%), and Mar RBOB gasoline (RBH24) closed up +0.56 (+0.25%).
Crude oil and gasoline prices on Wednesday posted moderate gains, with crude climbing to a 4-week high. Wednesday's decline in the dollar index to a 1-week low supported energy prices. Also, Wednesday's rally in the S&P 500 to a new record high shows optimism in the economic outlook that is bullish for energy demand and crude prices. Crude raced to its high Wednesday after EIA weekly crude inventories fell more than expected.
Wednesday's action by the PBOC to cut its reserve requirement ratio for banks by 50 bp to 10.00% supports crude prices as it will boost liquidity and may revive economic growth in China, the world's second-largest crude consumer.
Wednesday's economic news showed signs of strength in global manufacturing activity that is bullish for energy demand and crude prices. The U.S. Jan S&P manufacturing PMI unexpectedly rose +2.4 to 50.3, stronger than expectations of a decline to 47.6 and the fastest pace of expansion in 15 months. Also, the Eurozone Jan S&P manufacturing PMI rose +2.2 to a 10-month high of 46.6, stronger than expectations of 44.7.
Concerns about escalating geopolitical tensions in the Middle East support crude prices. The U.S. and the UK continue to launch airstrikes against Houthi rebels in Yemen in retaliation for Houthi attacks on commercial shipping in the Red Sea. Earlier this month, the U.S. Navy advised vessels to avoid the southern Red Sea. Houthis started attacking ships in the Red Sea in mid-November in support of Hamas in the Israeli-Hamas war and said they won't stop the attacks until Israel ends its assault on Gaza. Attacks on commercial shipping in the Red Sea by Iran-backed Houthi rebels have forced shippers to divert shipments around the southern tip of Africa instead of going through the Red Sea, disrupting global crude oil supplies.
A decline in Russian crude oil exports is supportive of crude oil prices. Tanker-tracking data from Vortexa monitored by Bloomberg shows the four-week average of refined fuel shipments from Russia fell to 2.62 million bpd in the four weeks to Jan 21, down -70,000 bpd from the prior week.
Crude prices have support after Ukraine on Sunday launched a drone attack that caused a fire and shut down Russia's Novatek PJSC's gas-condensate terminal in the port of Ust-Luga, close to some of Russia's most important oil export facilities. An attack by Ukrainian drones on Russian crude export terminals could disrupt Russian crude exports and is bullish for oil prices.
A bearish factor for crude oil was the announcement from Libya's National Oil Corp that crude flows from the Sharara oil field, which has been closed for the past three weeks, would resume. The Sharara oil field is Libya's largest and pumps about 300,000 bpd.
An increase in crude in floating storage is bearish for prices. Monday's weekly data from Vortexa showed that the amount of crude oil held worldwide on tankers that have been stationary for at least a week rose +3.2% w/w to 75.28 million bbl as of Jan 19.
On Nov 30, OPEC+ agreed to cut crude production by -1.0 million bpd through June 2024. However, crude prices sold off on the news since no details were provided on how the cuts would be distributed among members, nor how Russia's -300,000 bpd export cut would factor into the new totals. Delegates said the final details of the new accord, including national production levels, would be announced individually by each country rather than in the customary OPEC+ communique. The market was disappointed that the extra cuts in OPEC crude output will be announced by each individual country, which suggests the reductions are only voluntary. Meanwhile, on Dec 21, Angola announced that it was leaving OPEC amid a dispute over oil production quotas.
Saudi Arabia said on Nov 30 that it would maintain its unilateral crude production cut of 1.0 million bpd through Q1-2024. The move would maintain Saudi Arabia's crude output at about 9 million bpd, the lowest level in three years. Russia also said it will deepen its voluntary oil export cuts by 200,000 bpd to 500,000 bpd in Q1 of 2024. OPEC Dec crude production fell -40,000 bpd to 28.050 million bpd.
Wednesday's weekly EIA report was mixed for crude prices. On the bullish side, EIA crude inventories fell -9.23 million bbl, a larger draw than expectations of -1.4 million bbl. Also, EIA distillate stockpiles unexpectedly fell -1.42 million bbl versus expectations of a +1.0 million bbl build. In addition, crude supplies at Cushing, the delivery point of WTI futures, fell -2.0 million bbl. On the negative side, EIA gasoline inventories rose +4.9 million bbl to a 2-3/4 year high, a larger build than expectations of +2.0 million bbl as U.S. gasoline demand in the week ended Jan 19 fell -4.7% w/w to a 1-year low of 7.88 million bpd.
Wednesday's EIA report showed that (1) U.S. crude oil inventories as of Jan 19 were -5.4% below the seasonal 5-year average, (2) gasoline inventories were +1.6 above the seasonal 5-year average, and (3) distillate inventories were -3.7% below the 5-year seasonal average. U.S. crude oil production in the week ended Jan 19 fell -7.5% w/w to 12.3 million bpd, falling back from the previous week's record high of 13.3 million bpd.
Baker Hughes reported last Friday that active U.S. oil rigs in the week ended Jan 19 fell by -2 rigs to 497 rigs, just above the 2-year low of 494 rigs from Nov 10. The number of U.S. oil rigs in the past year has fallen from the 3-3/4 year high of 627 rigs posted in December 2022.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
