Crude Prices Rally on Energy Demand Optimism

Today’s weekly EIA inventory report was mixed for crude and products, with crude inventories increasing more than expected, but gasoline and distillate supplies falling more than expected.

Crude prices found support after OPEC+ agreed on Sunday to a 137,000 bpd increase in its crude production target, starting in November, which was less than market expectations of a potential 500,000 bpd boost to production.  OPEC+ is in the midst of boosting production by another 1.66 million bpd to fully reverse the 2.2 million bpd production cut seen in early 2024.  OPEC’s September crude production rose by +400,000 bpd to 29.05 million bpd, the highest in 2.5 years.

A bearish factor for crude was Saudi Arabia’s state-owned Aramco’s decision to keep the price of its main oil grade for Asian customers for November delivery unchanged, contrary to expectations of a 30-cent-a-barrel increase.  The lack of a price increase signaled weakness in energy demand and was bearish for crude prices.

Reduced crude production in Russia is supportive for oil prices after Reuters reported that Russia’s Kirishi oil refinery, with a capacity of 160,000 bpd, has halted most of its production following a Ukrainian drone attack and fire at the refinery on Saturday.  Ukraine has targeted at least 15 Russian refineries over the past two months, exacerbating a fuel crunch in Russia and limiting Russia’s crude export capabilities.  Ukrainian drone and missile attacks on Russian refineries have curbed Russia’s total refined-product flows to 1.94 million bpd in the first fifteen days of September, the lowest monthly average in over 3.25 years.  

A decrease in crude oil held worldwide on tankers is bullish for oil prices.  Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least seven days fell by -7% w/w to 82.81 million bbl in the week ended October 3.

The outlook for higher crude production in Iraq is expected to boost global oil supplies, which is bearish for crude prices.  Iraq recently announced that it had reached an agreement with the regional government of Kurdistan to resume oil exports from the Kurdish region via a pipeline to Turkey, which had been halted for the past two years due to a payment dispute.  Iraqi Foreign Minister Hussein said that the resumption of crude exports could add 500,000 bpd of fresh oil supplies to global markets.  

Crude prices have support from concerns that the ongoing war in Ukraine could lead to additional sanctions on Russian energy exports, reducing global oil supplies.  The US proposed that the G7 allies impose tariffs as high as 100% on China and India for their purchases of Russian oil in an effort to convince Russia to end the war in Ukraine.  

Today’s weekly EIA report was mixed for crude and products.  On the bullish side, EIA gasoline supplies fell by -1.60 million bbl, a larger draw than expectations of -1.38 million bbl.  Also, EIA distillate stockpiles fell by -2.0 million bbl, a larger draw than expectations of -734,000 bbl.  In addition, crude supplies at Cushing, the delivery point of WTI futures, fell by -963,000 bbl.  On the negative side, EIA crude inventories rose by +3.7 million bbl, a larger increase than expectations of a +350,000 bbl build.  

Today’s EIA report showed that (1) US crude oil inventories as of October 3 were -4.5% below the seasonal 5-year average, (2) gasoline inventories were -0.6% below the seasonal 5-year average, and (3) distillate inventories were -5.4% below the 5-year seasonal average.  US crude oil production in the week ending October 3 rose +0.9% w/w to 13.629 million bpd, just below the record high of 13.631 million bpd posted in the week of 12/6/2024.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ending October 3 fell by -2 to 422 rigs, modestly above the 4-year low of 410 rigs from August 1.  Over the past 2.5 years, the number of US oil rigs has fallen sharply from the 5.5-year high of 627 rigs reported in December 2022.