New Sanctions on Russia Rally Crude Prices

Oil – Fundamental Analysis
Crude prices were already poised for a technically-driven rebound, but across-the-board inventory draws, and new sanctions placed on Russian energy entities led to a $5.00+ rally this week. The US grade started the week as low as $56.35/bl. but pushed as high as $62.60/bl. by Friday. Brent followed a similar pattern, hitting its low of $60.35/bl. on Monday and its weekly high of $66.80 on Friday. Both grades settled much higher week-on-week with gains exceeding +$5.00/bl. The WTI/Brent spread has widened to ($4.40).

Political risk premium entered oil markets again this week in the form of new US sanctions on Russia’s two largest oil companies, Rosneft and Lukoil who represent about 50% of the country’s exports. The sanctions will preclude both companies from doing business with US banks and other financial institutions. The EU had imposed a new sanction package on the two last week along with some Chinese refiners.

From the start of the Russia/Ukraine war, Russia’s crude exports of about 3.0 million bld. have been the target for sanctions. Yet, to date, most sanctions have proved ineffective or have been circumvented. However, oil markets still react bullishly to such announcements. But this time around, India’s largest refiner, Reliance, is agreeing to halt the purchases of oil from Rosneft that were taking place under a long-term agreement which will impact the physical sales of Urals. China remains Russia’s No. 1 importer of oil. China is now also the No. 1 purchaser of Canadian bitumen, taking up to 70% of the 3.5 million bld. of the oil sands production being delivered to British Columbia ports via the expanded Trans Mountain pipeline.

The Energy Information Administration’s Weekly Petroleum Status Report (still released despite the government shut-down) indicated that commercial crude oil inventories for last week decreased by
-960k bl. to a total of 423 bl. million and -4% below the 5-year average. The API forecasted a -3.0 million bl. drop while market analysts forecasted a +1.0 million increase. US refinery utilization increased from 85.7% to 88.6%, representing a 600k million bpd. change in inputs to 15.7 million bpd. Total motor gasoline stocks fell -2.1 million bl. to 217 million bl. and are now slightly below the 5-year average. Gasoline demand was flat at 8.46 million bpd. vs. 8.46 the week prior and 8.8 a year ago. Distillates decreased -1.5 million bl. to 115. million Bbl. and are now at -7% below the 5-year average. Inventory at the key Cushing, OK hub changed -75k Bbl. to 21.2 million Bbl. or 28% of capacity. The SPR was +820k bbl. to 408.5 million bbl. Imports of crude oil were +600k bpd. to 5.9 million Bbld. vs. 5.3 the prior week while exports were 4.2 million bpd. vs. 4.5 the prior week. Exports of petroleum products were 7.4 million bpd. last week vs. 7.0 the prior week. Total US oil production was 13.6 million bld. vs. 13.5 last year at this time. The US rig count was +2 last week to 550 with oil flat +2 natural gas even. There are (35) fewer rigs operating than a year ago at this time. The DOE is soliciting bids for January delivery of 1.0 million bl. for the SPR. The announcement came on Wednesday, the same day as the reported inventory draw-downs which gave markets their midweek boost.

There appears to be a shift among the major E&P companies back to offshore development as onshore plays have matured. About 10 years ago, these same companies had shifted from the highly expensive, mega-projects to deploying capital onshore in “known” plays. With emerging discoveries in Guyana, Suriname and Brazil, IOCs are finding solid returns again.

AAA’s average US retail gasoline prices at the pump were most recently reported at $3.07/gal.,
+$0.013/gal. vs. last week, -0.095 /gal. from last month and -$0.082/gal. less than a year ago.

Inflation in September rose +3.0% year-on-year and was slightly higher than August’s +2.9% Some key data included a +15% increase in price of beef and +19% for coffee. Moving away from the Fed’s 2.0% target only serves to present the agency with a dilemma. Fighting inflation by raising interest rates could stifle growth while relaxing rates could lead to more spending and a further rise in inflation. New claims for unemployment benefits rose last week to 232k, up from the prior week’s 220k and above estimates of 227k to 229k. All (3) US stock market indexes are up on the week as the CPI report was viewed as a moderate increase which will not stop the Fed from another rate decrease. The USD is higher also which may serve to cap crude’s rally.