Crude Slumps on Dollar Strength and Reduced Geopolitical Risks

Rich Asplund - Barchart - Fri Feb 2, 2:19PM CST

March WTI crude oil (CLH24) on Friday closed down -1.54 (-2.09%), and Mar RBOB gasoline (RBH24) closed down -4.73 (-2.16%).

Crude oil and gasoline prices on Friday tumbled to 2-week lows and closed moderately lower. Friday's rally in the dollar index (DXY00) to a 7-week high weighed energy prices. Also, advanced negotiations to halt the war in Gaza and release hostages are reducing the geopolitical risk premium in crude prices. Technical selling added to Friday's decline in crude after prices fell below their 50 and 200-day moving averages, triggering trend-following algorithms.

Crude prices are under pressure as negotiations continue for a halt in the war in Gaza, which has threatened crude shipments from the Middle East. Bloomberg reported that talks are advancing for an agreement to pause the Israel-Hamas war and free civilian hostages captured by Hamas.

Friday's stronger-than-expected U.S. economic news is bullish for energy demand and crude prices. Jan nonfarm payrolls jumped +353,000, stronger than expectations of +185,000 and the biggest increase in a year. Also, the Jan unemployment rate was unchanged at 3.7%, showing a stronger labor market than expectations of an increase to 3.8%. In addition, the University of Michigan U.S. Jan consumer sentiment index was revised upward by +0.2 to a 2-1/2 year high of 79.0, stronger than expectations of 78.9.

Geopolitical tensions in the Middle East continue to support crude prices. President Biden said the U.S. would soon retaliate for the attack on a base in Jordan last Sunday by militants in Iraq that killed three U.S. service members. Last Friday, Houthi rebels ramped up attacks on commercial shipping in the Red Sea and struck an oil tanker with a missile that was carrying fuel in the Gulf of Aden. 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.

Crude prices also have support after a Ukranian drone attack last Thursday damaged Russia's Rosneft PJSC's major Tuapse refinery on Russia's Black Sea coast. Russia said last Friday that the Tuapse refinery, which processed 180,000 bpd of crude in the first half of January, will be shut down through at least February. In recent weeks, several Russian oil processing and storage facilities have been targeted and damaged by Ukrainian drone attacks, increasing the risks of reducing Russian crude exports.

A negative factor for crude prices was Monday's report from Kpler Ltd that showed OPEC+ members are dragging their feet on new crude output cuts. According to Kpler estimates, exports from the seven OPEC+ members engaged in new crude production cuts announced for January have averaged about 15.4 million bpd so far this month, barely changed from December.

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 3.09 million bpd in the four weeks to Jan 28, down -250,000 bpd from the prior week.

A decline 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 -18% w/w to 63.97 million bbl as of Jan 26, the lowest in 3-3/4 years.

On Nov 30, OPEC+ agreed to cut crude production by -1.0 million bpd through June 2024. However, a Bloomberg survey on Thursday showed the group cut production by -490,000 bpd in January, below the agreed-upon -1.0 million bpd cut. Meanwhile, on Dec 21, Angola announced 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 Jan crude production fell -1.59 million bpd to 26.570 million bpd, a 2-1/2 year low.

Wednesday's weekly EIA report showed that (1) U.S. crude oil inventories as of Jan 26 were -5.1% below the seasonal 5-year average, (2) gasoline inventories were +1.2 above the seasonal 5-year average, and (3) distillate inventories were -5.1% below the 5-year seasonal average. U.S. crude oil production in the week ended Jan 26 rose +5.7% w/w to 13.0 million bpd, modestly below the recent record high of 13.3 million bpd.

Baker Hughes reported Friday that active U.S. oil rigs in the week ended Feb 2 were unchanged at 499 rigs, just above the 2-year low of 494 rigs from Nov 10. The number of U.S. oil rigs has fallen over the past year from the 3-3/4 year high of 627 rigs posted in December 2022.

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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.