Crude Prices Fall on Dollar Strength and Lackluster OPEC Crude Cuts

March WTI crude oil (CLH24) this morning is down -1.17 (-1.50%), and Mar RBOB gasoline (RBH24) is down -5.38 (-2.31%).

Crude oil and gasoline prices this morning gave up an early advance and are moderately lower.  Today's rally in the dollar index (DXY00) to a 1-1/2 month high weighs energy prices.  Also, signs of a slow start to crude production cuts from OPEC+ members are keeping crude supplies ample and are bearish for prices.  Crude prices today initially rallied to a 2-month high on ramped-up geopolitical risks in the Middle East after three U.S. servicemen were killed in a drone attack on a base near the Syrian border.

Crude came under pressure today on a Kpler Ltd report showing OPEC+ members are slow to start new crude output cuts.  According to Kpler estimates, exports from the seven OPEC+ members engaged in new crude production cuts announced for January have averaged about 15.4 million bpd so far this month, barely unchanged from December.

The escalation of geopolitical tensions in the Middle East supports crude prices.  Last Friday, Houthi rebels ramped up attacks on commercial shipping in the Red Sea and struck an oil tanker with a missile that was carrying fuel in the Gulf of Aden.  The U.S. and the UK continue to launch airstrikes against Houthi rebels in Yemen in retaliation for Houthi attacks on commercial shipping in the Red Sea.  Earlier this month, the U.S. Navy advised vessels to avoid 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.

Crude prices also have support after a Ukranian drone attack last Thursday damaged Russia's Rosneft PJSC's major Tuapse refinery on Russia's Black Sea coast.  Russia said last Friday 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 the four-week average of refined fuel shipments from Russia fell to 2.62 million bpd in the four weeks to Jan 21, down -70,000 bpd from the prior week.

A decline in crude in floating storage is bullish for prices.  Today'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 -18% w/w to 63.97 million bbl as of Jan 26, the lowest in 3-3/4 years.

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.  Meanwhile, on Dec 21, Angola announced that 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 Dec crude production fell -40,000 bpd to 28.050 million bpd.

Last Wednesday's EIA report showed that (1) U.S. crude oil inventories as of Jan 19 were -5.4% below the seasonal 5-year average, (2) gasoline inventories were +1.6 above the seasonal 5-year average, and (3) distillate inventories were -3.7% below the 5-year seasonal average.  U.S. crude oil production in the week ended Jan 19 fell -7.5% w/w to 12.3 million bpd, falling back from the previous week's record high of 13.3 million bpd.

Baker Hughes reported last Friday that active U.S. oil rigs in the week ended Jan 26 rose 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 Prices Rebound as Houthi Rebels Strike an Oil Tanker in the Red Sea
• Crude Prices Fall Back on Concerns About Global Energy Demand
• Crude Sharply Higher on U.S. Economic Strength Amid Tighter Global Supplies
• Crude Prices Climb on U.S. Economic Strength Amid Tighter Global Supplies

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