Demand Fears Stronger Than Supply Fears
Demand fears appear to be stronger than supply fears this week as energy prices stagnate even though it appears that the Iranian military has been placing bombs on oil tankers near the world’s most important shipping lane. The 2nd week of each month brings a data deluge as various global agencies publish their monthly reports, and this week’s theme was that oil demand is softening, and that appears to have kept buyers on the sidelines despite the drama playing out in the Gulf of Oman.
The battle of words between the US & Iran appears to be staying just that, which is a great relief for many – not just energy consumers – even as video evidence suggests a clear link to Iranian forces and yesterday’s tanker attacks. That lack of escalation – coupled with ongoing demand worries – tempered the market reaction to the attacks, with the big 4 petroleum contracts all still holding losses for the week. I would not be surprised to see a price rally this afternoon however as traders tend not to like being short heading into a weekend with this type of geopolitical tension looming.
The IEA’s monthly oil report was the third this week to note the negative effects of various trade issues on global oil demand. The report that demand growth in the first quarter grew at the slowest rate since the financial crisis, offsetting ongoing supply issues in Iran, Venezuela, Libya etc. While global demand continues to grow, OECD nations are seeing a decline in oil demand, with a petrochemical slowdown in Europe and “tepid” gasoline & diesel demand in the US both cited. The other particularly relevant point made in the monthly report was that the benefit of OPEC supply cuts is that it also increases the world’s spare production capacity.
With US production capabilities soaring, the total global spare oil production capacity may be at levels we haven’t seen in decades, and certainly appears to be acting as a speed bump for prices considering how they’ve barely moved even though the world’s most strategic waterway has hosted numerous ship attacks in the past 2 months.
The EIA reported yesterday that US crude imports from OPEC members dropped to a 30-year low in March.
The Dallas FED’s June energy indicator report showed that support activities for mining operations in Texas have fallen sharply as rig counts have dropped in the past few months. Like the monthly reports from the EIA, OPEC and IEA, this report also noted a slowdown in oil consumption across developed nations.
While petroleum prices are stagnating, corn and ethanol prices have reached multi-year highs this week as more heavy rain is forecast across the mid-continent, threatening to take this year’s crop progress from bad to worse.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
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Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.