Crude Recovers Losses on Geopolitical Risks

March WTI crude oil (CLH24) on Monday closed up +0.50 (+0.69%), and Mar RBOB gasoline (RBH24) closed up +6.18 (+2.88%).

Crude oil and gasoline prices on Monday closed higher.  Crude prices Monday recovered from a 2-1/2 week low and posted moderate gains due to geopolitical risks in the Middle East after the U.S. and UK ramped up attacks on Houthi rebels in Yemen and Iran-backed militants in Syria and Iraq.  Also, a Ukranian drone attack shut a sizable amount of refining capacity at Russia's Lukoil PJSC facility in Volgograd, which boosted European fuel prices and may prompt Europe to boost its imports of U.S. fuels.

Crude prices Monday initially moved lower due to a rally in  the dollar index to a 2-1/2 month high and from hawkish Fed comments that reduced expectations for Fed rate cuts and curbed risk sentiment in asset markets.  

Monday's global economic news was mixed for energy demand and crude prices.  On the positive side, the U.S. Jan ISM services index rose +2.9 to a 4-month high of 53.4, stronger than expectations of 52.0.  Also, the Eurozone Feb Sentix investor confidence index rose +2.9 to a 10-month high of -12.9, stronger than expectations of -15.0.  On the negative side, the China Jan Caixin services PMI unexpectedly fell -0.2 to 52.7, weaker than expectations of an increase to 53.0.  Also, German Dec exports fell -4.6% m/m, weaker than expectations of -2.8% m/m and the biggest decline in a year.  

Geopolitical tensions in the Middle East continue to support crude prices.   The U.S. and UK ramped up airstrikes against Houthi rebels in Yemen in retaliation for Houthi attacks on commercial shipping in the Red Sea.  Last 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 from Ukranian drone attacks on Russian refineries and oil storage facilities.  On Sunday, a drone attack by Ukraine damaged Russia's Lukoil PJSC facility in Volgograd, which processed 289,000 bpd of crude oil in January, or more than 5% of Russia's total crude processing volume.  On Jan 25, a drone attack damaged Russia's Rosneft PJSC's major Tuapse refinery on Russia's Black Sea coast.  Russia said on Jan 26 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 negative factor for crude prices was last Monday's Kpler Ltd report that said OPEC+ members are dragging their feet on 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 changed from December.

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 3.09 million bpd in the four weeks to Jan 28, down -250,000 bpd from the prior week.

An increase in crude in floating storage is bearish 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 rose +8.3% w/w to 73.09 million bbl as of Feb 2.

On Nov 30, OPEC+ agreed to cut crude production by -1.0 million bpd through June 2024.  However, a Bloomberg survey on Thursday showed the group cut production by -490,000 bpd in January, below the agreed-upon -1.0 million bpd cut.  Meanwhile, on Dec 21, Angola announced 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 Jan crude production fell -1.59 million bpd to 26.570 million bpd, a 2-1/2 year low.

Last Wednesday's weekly EIA report showed that (1) U.S. crude oil inventories as of Jan 26 were -5.1% below the seasonal 5-year average, (2) gasoline inventories were +1.2 above the seasonal 5-year average, and (3) distillate inventories were -5.1% below the 5-year seasonal average.  U.S. crude oil production in the week ended Jan 26 rose +5.7% w/w to 13.0 million bpd, modestly below the recent record high of 13.3 million bpd.

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

• Crude Prices Slip on Dollar Strength and a Decline in Risk Sentiment
• Crude Slumps on Dollar Strength and Reduced Geopolitical Risks
• Crude Prices Fall as Gaza Negotiations Advance
• Crude Prices Retreat on Talks of a Pause in the Israel-Hamas Conflict

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