Easing Geopolitical Risks in the Middle East Weigh on Crude

Rich Asplund - Barchart - Fri May 3, 2:21PM CDT

June WTI crude oil (CLM24) on Friday closed down -0.84 (-1.06%), and June RBOB gasoline (RBM24) closed down -4.14 (-1.59%).

Crude oil and gasoline prices Friday were under pressure the entire day and posted 1-1/2 month lows. Improved prospects for a cease-fire in the Israeli-Hamas war have curbed geopolitical risks in the Middle East and undercut crude prices. Also, US energy demand concerns are negative for crude due to Friday's weaker-than-expected economic reports on Apr nonfarm payrolls and the Apr ISM services index. Limiting losses in crude was Friday's fall in the dollar index (DXY00), which fell to a 3-week low.

Easing geopolitical tensions reduces the risk premium for crude and is bearish for prices. Hamas said on Friday that it was studying the current cease-fire proposal and plans to send a delegation to Egypt to continue negotiations. The improved cease-fire prospects reduce the chances of an escalation of the Israel-Hamas conflict that could jeopardize crude shipments from the Middle East.

Friday's weaker-than-expected US economic news is bearish for energy demand and crude prices. Apr nonfarm payrolls rose +175,000, below expectations of +240,000 and the smallest increase in 6 months. Also, the Apr ISM services index unexpectedly fell -2.0 to 49.4, weaker than expectations of a rise to 52.0 and the steepest pace of contraction in 16 months.

A decrease in crude in floating storage is bullish 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 fell -17% w/w to 62.83 million bbl as of April 26.

Reduced crude demand in India, the world's third-largest crude consumer, is negative for oil prices after India's March oil demand fell -0.6% y/y to 21.09 MMT.

Crude prices have underlying support from the Israel-Hamas war and concern that the war might spread to Hezbollah in Lebanon or even to a direct conflict with Iran. Also, 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.

Crude has support from the recent Ukrainian drone attacks on Russian refineries that damaged several Russian oil processing facilities, limiting Russia's fuel exporting capacity. Russia's fuel exports in the week to April 28 fell by -120,000 bpd from the prior week to 3.43 million bpd. JPMorgan Chase said it sees 900,000 bpd of Russian refinery capacity that could be offline "for several weeks if not months" from the attacks, adding $4 a barrel of risk premium to oil prices.

Crude prices have support from April 3 when OPEC+, at its monthly meeting, did not recommend any changes to their existing crude output cuts, which kept about 2 million bpd of production cuts in place until the end of June. However, OPEC crude production in March rose +10,000 bpd to 26.860 million bpd, a bearish factor for oil prices as Iraq and UAE continue to pump above their production quotas.

Wednesday's EIA report showed that (1) US crude oil inventories as of April 26 were -2.6% below the seasonal 5-year average, (2) gasoline inventories were -3.2% below the seasonal 5-year average, and (3) distillate inventories were -6.9% below the 5-year seasonal average. US crude oil production in the week ending April 26 was unchanged w/w at 13.1 million bpd, below the recent record high of 13.3 million bpd.

Baker Hughes reported Friday that active US oil rigs in the week ended May 3 fell by -7 rigs to 499 rigs, modestly above the 2-year low of 494 rigs posted on November 10. The number of US oil rigs has fallen over the past year from the 4-year high of 627 rigs posted in December 2022.

More Crude Oil News from Barchart

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.