Crude Prices Rebound on U.S. Economic Strength

February WTI crude oil (CLG24) on Wednesday closed up +0.16 (+0.22%), and Feb RBOB gasoline (RBG24) closed up +1.35 (+0.64%).

Crude oil and gasoline prices on Wednesday recovered from early losses and settled higher.  Better-than-expected U.S. economic news Wednesday signals strength in the economy that supports energy demand and crude prices.  Also, heightened geopolitical risks in the Middle East are bullish for crude as Houthi rebels continue to attack ships in the Red Sea off Yemen's coast.  

Crude prices Wednesday initially moved lower and fell to a 1-week low after the dollar index climbed to a 1-month high.  Also, Wednesday's selloff in global equity markets sparked a risk-off mood across asset markets.  In addition, weaker-than-expected economic news in China, the world's second-largest crude consumer, is negative for energy demand and crude prices.

Wednesday's U.S. economic news was better than expected and supported energy demand and crude prices.  Dec retail sales rose +0.6% m/m, stronger than expectations of +0.4% m/m.  Also, Dec manufacturing production rose +0.1% m/m, stronger than expectations of no change.  In addition, the Jan NAHB housing market index rose +7 to 44, stronger than expectations of 39.

By contrast, Wednesday's economic news from China was bearish for energy demand and crude prices.  China's Q4 GDP grew +5.2% y/y, slightly weaker than expectations of +5.3% y/y.  Also, China's Dec retail sales eased to +7.4% y/y from +10.1% y/y in Nov, weaker than expectations of +8.0% y/y.  In addition, China's Dec new home prices fell -0.45% m/m, the biggest decline in 8-3/4 years and the seventh consecutive month that home prices have fallen.

The recent series of hostile incidents in the Red Sea against commercial shipping is bullish for oil prices.  Last Friday, the U.S. Navy advised vessels to stay away from 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.

An increase in Russian crude oil exports is bearish for crude oil prices.  Tanker-tracking data from Vortexa monitored by Bloomberg shows the four-week average of refined fuel shipments from Russia rose to 2.77 million bpd in the four weeks to Jan 14, up +53,000 bpd from the prior week.

Crude oil prices have support from tighter global crude supplies after Libya's National Oil Corporation declared force majeure on Jan 7 at its Sharara oil field, which was shut down on Jan 3 after protestors entered the facility.  The Sharara oil field is Libya's largest and pumps about 300,000 bpd.

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 -14% w/w to 75.76 million bbl as of Jan 12.

A bearish factor for crude was the announcement from Angola on Dec 21 that it is leaving OPEC amid a dispute over oil production quotas.  Angola is Africa's second-largest crude producer, and the rift between Angola and other OPEC+ members is a bearish factor that signals infighting among members.  Other OPEC members may balk at Saudi Arabia's attempt to force all members into a production cut.

On Nov 30, OPEC+ agreed to cut crude production by -1.0 million bpd through June 2024.  However, crude prices sold off on the news since no details were provided on how the cuts would be distributed among members, nor how Russia's -300,000 bpd export cut would factor into the new totals.  Delegates said the final details of the new accord, including national production levels, would be announced individually by each country rather than in the customary OPEC+ communique.  The market was disappointed that the extra cuts in OPEC crude output will be announced by each individual country, which suggests the reductions are only voluntary.

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 Dec crude production fell -40,000 bpd to 28.050 million bpd.

The consensus is that Thursday's weekly EIA crude inventories will fall by -850,000 bbl.

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of Jan 5 were -2.1% below the seasonal 5-year average, (2) gasoline inventories were +1.4 above the seasonal 5-year average, and (3) distillate inventories were -3.3% below the 5-year seasonal average.  U.S. crude oil production in the week ended Jan 5 was unchanged w/w at 13.2 million bpd, just below the recent record of 13.3 million bpd.

Baker Hughes reported last Friday that active U.S. oil rigs in the week ended Jan 12 fell by -2 rigs to 499 rigs, just above the 2-year low of 494 rigs from Nov 10.  The number of U.S. oil rigs in the past year has fallen from the 3-3/4 year high of 627 rigs posted in December 2022.
 

• Crude Oil Falls on Dollar Strength and Risk-Off Sentiment in Asset Markets
• Crude Prices Erase Early Gains on Dollar Strength and Increased Russian Fuel Exports
• Crude Prices Underpinned as Houthi Rebels Continue to Attack Ships in Red Sea
• Crude Prices Settle Higher on Heightened Geopolitical Risks in the Middle East

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