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Rich Asplund

Crude Prices Jump on Heightened Geopolitical Risks in the Middle East

May WTI crude oil (CLK24) this morning is up +2.15 (+2.53%), and May RBOB gasoline (RBK24) is up +6.47 (+2.33%).

Crude and gasoline prices this morning are sharply higher, with crude posting a 5-1/2 month high and gasoline posting a 7-1/2 month high.  Concern that an escalation of conflict in the Middle East could disrupt global crude supplies is fueling today's rally in crude.  Today's rally in the dollar index (DXY00) to a 5-1/4 month high is bearish for energy prices.

Crude oil prices jumped today after Western intelligence assessments said an assault on Israeli government assets from missiles or drones by Iran or its proxies is expected to come as soon as the next 48 hours on revenge for the recent Israel airstrike on Iran's consulate in Syria that killed some top Iranian military commanders.  An escalation of hostilities in the Middle East could lead to the disruption of crude supplies from the region.

The strength of the crude crack spread is bullish for oil prices after the crack spread today rose to a 1-week high.  The stronger crack spread encourages refiners to boost their crude purchases and refine it into gasoline and distillates.

Reduced crude demand in India, the world's third-largest crude consumer, is negative for oil prices after India's March oil demand fell -0.6% y/y to 21.09 MMT.

Crude has support from the recent Ukrainian drone attacks on Russian refineries that damaged several Russian oil processing facilities, limiting Russia's fuel exporting capacity.  Russia's fuel exports in the week to April 7 fell by -450,000 bpd from the prior week to 3.39 million bpd.  JPMorgan Chase said it sees 900,000 bpd of Russian refinery capacity that could be offline "for several weeks if not months" from the attacks, adding $4 a barrel of risk premium to oil prices.

Crude prices have carryover support from last Wednesday when OPEC+, at its monthly meeting, did not recommend any changes to their existing crude output cuts, which kept about 2 million bpd of production cuts in place until the end of June.  However, OPEC crude production in March rose +10,000 bpd to 26.860 million bpd, a bearish factor for oil prices as Iraq and UAE continue to pump above their production quotas.  

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 -17% w/w to 65.30 million bbl as of April 5.

The recent strength of Chinese crude oil demand is bullish for prices.  Recent government data showed that China processed a record 118.76 MMT of crude in January and February, up +3% from the same time last year.  Also, Chinese fuel demand jumped, with expressway passenger volumes 54% higher than 2019 levels, while airlines saw 19% more people than the pre-pandemic peak.

Crude prices have underlying support from the Israel-Hamas war and concern that the war might spread to Hezbollah in Lebanon.  Also, 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.

Wednesday's EIA report showed that (1) US crude oil inventories as of April 5 were -1.9% below the seasonal 5-year average, (2) gasoline inventories were -2.9% below the seasonal 5-year average, and (3) distillate inventories were -5.1% below the 5-year seasonal average.  US crude oil production in the week ending April 5 was unchanged w/w at 13.1 million bpd, below the recent record high of 13.3 million bpd.

Baker Hughes reported last Friday that active US oil rigs in the week ended April 5 rose by +2 rigs to 508 rigs, moderately above the 2-year low of 494 rigs posted on November 10.  The number of US oil rigs has fallen over the past year from the 3-3/4 year high of 627 rigs posted in December 2022. 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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