Crude Sharply Lower on Dollar Strength and Weak Chinese Fuel Demand

Nov WTI crude oil (CLX22) on Friday closed down -3.48 (-3.91%), and Nov RBOB gasoline (RBX22) closed down -7.25 (-2.68%).  

Crude oil and gasoline prices Friday sold off sharply, with crude falling to a 1-1/2 week low.  A stronger dollar (DXY00) Friday undercut energy prices.  Also, slack energy demand in China, the world's largest crude importer, weighed on crude prices.  In addition, stock weakness Friday reduced confidence in the economic outlook and is negative for energy demand.  Finally, crude prices fell to their lows Friday after weekly data from Baker Hughes showed active U.S. oil rigs rose to a 2-1/2 year high.

Weakness in Chinese energy demand is bearish for crude prices.  Air travel in China during the Golden Week holiday in the first week of October was down -42% from a year earlier, and road trips by Chinese tourists during the week-long holiday were down about -30% from a year ago.  Transportation accounts for about half of oil consumption in China.

An article in China's state-sponsored People’s Daily newspaper Tuesday said China's Covid Zero policy is “sustainable,” and the country must stick to the strategy.  China's strict Covid lockdowns have hurt energy demand in recent months.  Chinese refineries in July handled the least amount of oil since March 2020 as Covid lockdowns and refinery shutdowns for maintenance undercut crude demand.  Also, current crude demand remains weak as China's Bureau of Statistics reported China Aug crude processing rose just +0.9% from July and was still down -8% y/y to 12.69 million bpd.

Crude oil prices rallied sharply last week after OPEC+ last Wednesday agreed to cut its collective output by -2.0 million bpd for November and December, a bigger cut than expectations of -1.0 million bpd.  Saudi Arabia's energy minister said the real-world impact of the crude production cuts would likely be around 1 million to 1.1 million bpd from November, given some members are already pumping well below their quotas.  

Stronger crude demand in India, the world's third-largest crude-consuming nation, is bullish for oil prices.  India's Oil Ministry reported last Friday that India's Sep oil products consumption rose +8.1% y/y to 17.2 MMT.

Comments from Nigeria's oil minister last Wednesday were bullish for crude prices when he said OPEC wants crude prices around $90 per barrel and "we have to take every step to ensure prices remain" within this range.

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 -6.3% w/w to 85.45 million bbls in the week ended October 7.

OPEC crude production in September rose +230,000 bpd to a 2-1/2 year high of 29.89 million bpd.  An increase in crude exports from Libya is bearish for oil prices after Libya Sep crude exports jumped +25% m/m to 1.16 million bpd, a 14-month high.

Oil prices are seeing support from the dim prospects for a nuclear deal with Iran that would lift sanctions against Iran and allow its crude back onto the global markets.  The International Atomic Energy Agency (IAEA) recently said that "the information gap is bigger and bigger" on Iran's recent nuclear activities.  Also, the European Union's chief negotiator recently said that "in light of Iran's failure to conclude the agreement on the table, we will consult with our international partners on how best to deal with Iran's continued nuclear escalation."

Thursday's EIA report showed that (1) U.S. crude oil inventories as of October 7 were -0.7% below the seasonal 5-year average, (2) gasoline inventories were -8.0% below the seasonal 5-year average, and (3) distillate inventories were -23.8% below the 5-year seasonal average.  U.S. crude oil production in the week ended October 7 fell -0.8% w/w to 11.9 million bpd, which is only -1.2 million bpd (-9.2%) 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 October 14 jumped by +8 rigs to a 2-1/2 year high of 610 rigs.  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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