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Crude Slumps on Dollar Strength and Suspect Chinese Energy Demand

Barchart - Fri Feb 3, 2023

Mar WTI crude oil (CLH23) on Friday closed down -2.49 (-3.28%), and Mar RBOB gasoline (RBH23) closed down -13.13 (-5.35%).  

Crude oil and gasoline prices Friday sold off to 3-week lows and closed sharply lower.  A rally in the dollar index (DXY00) to a 3-week high Friday undercut energy prices.  Crude was also under pressure on signs of an uneven recovery in China, keeping the country's energy demand depressed.

An uneven recovery in China's economy from ending pandemic restrictions is negative for crude prices.  Although a surge in consumer spending last month during the Lunar New Year holiday spurred optimism about China's rebound, signs of weakness among manufacturers and sales of cars and homes signal the recovery isn't yet on a sure footing.

Friday's U.S. economic data signals economic strength that supports energy demand and crude prices.  Jan nonfarm payrolls surged +517,000, much stronger than expectations of +188,000 and the largest increase in 6 months.  Also, the Jan unemployment rate unexpectedly fell -0.1 to a 53-year low of 3.4%, showing a stronger labor market than expectations of an increase to 3.6%.  In addition, the  Jan ISM services index rose +6.0 to 55.2, stronger than expectations of 50.5.

The crude crack spread Friday dropped to a 6-week low and is bearish for crude prices.  Weakness in the crack spread discourages refiners from purchasing crude oil to refine it into gasoline and distillates.

On Wednesday, the OPEC+ Joint Ministerial Monitoring Committee recommended keeping crude production levels steady as the oil market awaits clarity on demand in China and crude supplies from Russia.  Goldman Sachs predicts that OPEC+ will only start to reverse its supply cuts, currently about 2 million bpd, in the second half of this year when accelerating demand will tighten the market.

Signs of strength in Chinese fuel demand support crude prices after Sinopec reported that retail gasoline sales at gas stations affiliated with Sinopec in China rose +20% over the Lunar New Year break compared to the same period last year.  Also, China's Civil Aviation Administration reported that China's domestic air travel surged during the week-long holiday by 79.8% compared with the same period in 2022.  

In a bullish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week fell -16% w/w to 75.20 million bbl in the week ended January 27.

A reduction in OPEC crude output is bullish for oil prices.  OPEC Jan crude production fell -60,000 bpd to 29.12 million bpd.

Wednesday's EIA report showed that (1) U.S. crude oil inventories as of January 27 were +3.5% above the seasonal 5-year average, (2) gasoline inventories were -6.8% below the seasonal 5-year average, and (3) distillate inventories were -17.1% below the 5-year seasonal average.  U.S. crude oil production in the week ended January 27 was unchanged w/w at 12.2 million bpd, which is only 0.9 million bpd (-6.9%) below the Feb-2020 record-high of 13.1 million bpd.

Baker Hughes reported Friday that active U.S. oil rigs in the week ended February 3 fell by -10 rigs to a 4-3/4 month low of 599 rigs, moderately below the 2-1/2 year high of 627 rigs posted on December 2.  U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signaling an increase in U.S. crude oil production capacity.
 



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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.