Oil – Fundamental Analysis

After a period of consolidation, crude prices moved steadily higher this week right through the $64/$65/$66 per bl. levels but have now breached a key technical indicator that signals they have gone “too high, too fast”. The geopolitical risk premium in oil prices rose this week in the form of sanctions and outright attacks on Russian infrastructure along with Russian jets entering the airspace of neighboring NATO member countries. A slight draw in crude inventory with larger declines in refined products stored also added some support for prices. WTI was as low as $61.85/bl. on Tuesday with its high on Friday at $66.45. Brent crude hit its low on Monday at $66.10/bl. with its high of $70.75 occurring Friday as well.  Both grades look to settle higher week-on-week. The WTI/Brent spread has widened to ($4.35).

Ukraine drone strikes continue to target Russian refineries which is impacting the production of diesel and gasoline. Russia has been banning gasoline exports and will now ban diesel exports through the end of the year. However, Russia has been able to resume crude exports from its main hub after drone attacks occurred Wednesday. And, with the reduced refinery consumption, Russia has increased its oil exports to 3.2 million bld. this month.

While not directly impacting Russian energy exports, recent flyovers into NATO countries by its military jets has created a new area of geopolitical tensions especially as Trump encouraged the NATO members to shoot them down. Russian jets have also been conducting flights off of Alaska. Meanwhile, traders are waiting for the impact of the more recently announced EU sanctions on oil entities in countries dealing with Russia’s oil sector. And, despite Trump’s attempt to pressure Hungary into cutting Russian energy imports, Prime Minister Orban at a White House meeting reinforced his country’s need and, right, to purchase energy from Russia to keep its economy running. It’s a similar stance to the one taken by India which has recently suggested that, if allowed to purchase crude from Venezuela and Iran, it could reduce its imports of Urals. Finally, Iraq has indicated that exports from Kurdistan of about 240k bld. will finally resume after the 2-year halt.

The Energy Information Administration’s Weekly Petroleum Status Report indicated that commercial crude oil inventories for last week decreased by -0.6 million bl. to a total of 414.8 bl. million and -4% below the 5-year average. The API forecasted a -3.8 million bl. drop while market analysts forecasted a

-0.3 million decline. US refinery utilization dipped to 93.0% from 93.3%. That represents -50k bpd. change in inputs to 16.48 million bpd. Total motor gasoline stocks increased -1.1 million bl. to 216.5 million bl. and -2% below the 5-year average. Gasoline demand was +150k bpd to 9.0 million bpd. vs. 8.85 the week prior and 8.5 a year ago. Distillates decreased -1.7 million bl. to 123 million Bbl. and are now at -8% below the 5-year average. Inventory at the key Cushing, OK hub changed +177k Bbl. to 23.7 million Bbl. or 32% of capacity. The SPR was +23k bbl. to 406 million bbl. Imports of crude oil were +800k bpd. to 6.5 million Bbld. vs. 5.7 the prior week while exports were 4.5 million bpd. vs. 5.3 the prior week. Exports of petroleum products were 7.2 million bpd. last week vs. 6.3 the prior week. Total US oil production was 13.5 million bld. vs. 13.2 last year at this time. The US oil rig count rose +6 last week to 424 while gas rigs were -1 at 117. Total US rigs are now 549 vs. 584 last year at this time.

Recent EIA data indicates that 2025 will be another annual record for oil production as year-to-date supply has averaged 13.44 million bld., +1.9% above last year’s record pace. However, the agency predicts slower growth ahead due to rising costs, depleting prime acreage, increased capital discipline among producers and, infrastructure bottlenecks.

AAA’s average US retail gasoline prices at the pump were most recently reported at $3.148/gal.,

-$0.051/gal. vs. last week, -0.038 /gal. from last month and -$0.072/gal. less than a year ago.

Sales of existing homes last month fell -0.2% leading to an inventory of 4.6 months of supply. The PCE index, the Federal Reserve’s preferred inflation gauge, rose last month but not enough to discourage possible future interest rate cuts. The index was +0.3% for August and +2.7% from August 2024. Investors are optimistic about another rate reduction next month but less so for November. US Personal Spending rose +0.6% In Aug vs. an expectation of +0.5%. All (3) major US stock indexes are lower week-on-week as investors gauge the impact of the PCE report. The USD Is higher which may keep a cap on crude’s rally.