Crude Prices Climb on U.S. Economic Strength

Rich Asplund - Barchart - Thu Feb 22, 2:32PM CST

April WTI crude oil (CLJ24) on Thursday closed up +0.70 (+0.90%), and Apr RBOB gasoline (RBJ24) closed up +3.67 (+1.45%).

Crude oil and gasoline prices on Thursday posted moderate gains. Signs of strength in the U.S. economy supported energy demand and crude prices after Thursday's news showed weekly jobless claims fell to a 5-week low and the Feb S&P manufacturing PMI rose to a 17-month high. Also, Thursday's rally in the S&P 500 to a new record high shows confidence in the economic outlook that supports energy demand and crude prices.

Crude prices extended their gains Thursday after weekly EIA crude inventories rose less than expected. A weaker dollar on Thursday was another bullish factor for energy prices.

Thursday's U.S. economic news was supportive of energy demand and crude prices. Weekly initial unemployment claims unexpectedly fell -12,000 to a 5-week low of 201,000, showing a stronger labor market than expectations of an increase to 216,000. Also, the Feb S&P manufacturing PMI rose +0.8 to a 17-month high of 51.5, stronger than expectations of no change at 50.7. In addition, Jan existing home sales rose +3.1% to a 5-month high of 4.00 million, stronger than expectations of 3.97 million.

Crude prices are supported by concern that the Israel-Hamas war will widen to Lebanon after the leader of Hezbollah said it would retaliate against Israel and hit "not just army sites" in Israel after Israel attacked positions and killed civilians in Lebanon. Hezbollah and Israel have traded fire almost daily since the Israel-Hamas war erupted on Oct 7. Also, the U.S. and UK have engaged in airstrikes against Houthi rebels in Yemen in retaliation for Houthi attacks on commercial shipping in the Red Sea. 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 from Ukrainian drone attacks on Russian refineries and oil storage facilities that have curtailed Russian fuel exports. On Feb 3, a drone attack by Ukraine damaged Russia's Lukoil PJSC facility in Volgograd, which processed 289,000 bpd of crude oil in January, or more than 5% of Russia's total crude processing volume. On Jan 25, a drone attack damaged Russia's Rosneft PJSC's major Tuapse refinery on Russia's Black Sea coast. Russia said on Jan 26 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 decline in Russian crude oil exports is supportive of crude oil prices. Tanker-tracking data from Vortexa, monitored by Bloomberg, shows Russian crude exports in the week to Feb 11 fell about -290,000 bpd from the prior week to 3.49 million bpd.

Strong oil-product consumption in India, the world's third largest crude consumer, is bullish for oil prices after India's Jan oil-product consumption rose +8.3% y/y to 20 MMT, the most in 9 months.

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 -19% w/w to 73.18 million bbl as of Feb 16.

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 only -490,000 bpd in January, less than the official -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.

Thursday's weekly EIA report was mixed for crude and its products. On the bullish side, EIA crude inventories rose +3.51 million bbl, below expectations of +3.75 million bbl. Also, EIA distillate stockpiles fell -4.0 million bbl, a bigger draw than expectations of -2.1 million bbl. On the negative side, EIA gasoline supplies fell -293,000 bbl, a smaller draw than expectations of -2.6 million bbl. Also, crude stockpiles at Cushing, the delivery point of WTI futures, rose +741,000 bbl.

Thursday's EIA report showed that (1) U.S. crude oil inventories as of Feb 16 were -1.8% below the seasonal 5-year average, (2) gasoline inventories were -1.9% below the seasonal 5-year average, and (3) distillate inventories were -10.4% below the 5-year seasonal average. U.S. crude oil production in the week ended Feb 16 was unchanged w/w at a record high of 13.3 million bpd.

Baker Hughes reported last Friday that active U.S. oil rigs in the week ended Feb 16 fell by -2 rigs to 497 rigs, just above the 2-year low of 494 rigs posted on 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.