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Rich Asplund

Crude Prices Retreat on Hopes of Descalation in the Iran-Israel Conflict

May WTI crude oil (CLK24) this morning is down -0.90 (-1.05%), and May RBOB gasoline (RBK24) is down -3.64 (-1.30%).

Crude and gasoline prices this morning are on the defensive, with crude prices falling to a 1-1/2 week low.  Crude oil prices are lower on hopes that the Iran-Israeli conflict can be contained.  Also, today's rally in the dollar index to a 5-1/4 month high is negative for energy prices.  

Crude oil prices recovered from their worst levels today on concerns about the Iran-Israeli conflict after Axios reported that Israeli Defense Minister Gallant said that Israel had no choice but to retaliate against Iran for its weekend drone and missile attack against Israel.  Iran's missile and drone strike was clearly telegraphed and did no major damage, but Iran nevertheless raised the stakes by attacking Israel directly from its own territory rather than via proxies.  There are hopes that any Israeli retaliation will be limited and will perhaps conclude latest round of tensions that began with Israel striking an Iranian consulate in Syria and killing some top Iranian military generals.

Signs of strength in the global economy are supportive for the economic outlook and crude oil prices.  US Mar retail sales rose +0.7% m/m, stronger than expectations of +0.4% m/m.  Also, Eurozone Feb industrial production rose +0.8% m/m, right on expectations.  In addition, Japan Feb core machine orders rose +7.7% m/m, stronger than expectations of +0.8% m/m and the largest increase in 13 months.

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 support from April 3 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.  

An increase in crude in floating storage is bearish 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 rose +11% w/w to 78.80 million bbl as of April 12.

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.

Last 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 12 fell by -2 rigs to 506 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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