Crude Oil Prices Settle Higher as Distillate Supplies Remain Tight

December WTI crude oil (CLZ26) closed up +2.40 (+2.72%) on Thursday, and December RBOB gasoline (RBZ26) closed up +0.0348 (+1.28%).

Crude oil and gasoline prices recovered from overnight losses on Thursday and settled sharply higher today as short covering emerged after fresh attacks by Ukraine on Russian oil refiners, which could squeeze global energy supplies.  Crude also has support on tightness in distillate stockpiles, including diesel, after Wednesday’s weekly EIA report showed US distillate inventories sank to a 23-year low. 

Crude prices pushed higher on Thursday after Ukraine launched a drone attack on Russia's 340,000 bpd Ryazan refinery, one of the country's largest.  Ukraine has ramped up its attacks on Russian oil facilities over the past week, attacking five refineries and a major crude-pumping station.  

Crude prices held gains Thursday after Saudi Arabian state producer Aramco cut its crude prices for Asian buyers next month by less than expected.  Aramco cut its crude price for Asian buyers for December delivery by $2 a barrel, less than market expectations of a $5 decrease from November.

Crude prices initially fell on Thursday, with Dec WTI crude oil dropping to a 2-month low and gasoline falling to a 7.75-month low.  Crude prices are being pressured by speculation that Democrats retaking Congress in the US midterm elections could accelerate efforts to end the US-Iran war. 

Despite the ongoing US-Iran conflict, oil supplies are still leaving the Middle East.  Combined exports from Saudi Arabia, the United Arab Emirates, Iraq, and Kuwait climbed 10% to 15.53 million bpd in October, roughly in line with levels shipped at the start of the year, according to tanker-tracking data compiled by Bloomberg.

Higher Saudi crude output is bearish for crude prices.  Saudi Arabia said its Sep crude production rose by 2 million bpd (+40% m/m) to 8.732 million bpd, recovering from a 36-year low in August.  However, Saudi oil production continues to be threatened by Houthi missile attacks on Saudi Arabia and by the Houthi threats to oil shipments near the Bab-al-Mandeb Strait.

Recent attacks by Ukraine on Russian oil infrastructure have curbed Russian crude production and exports. Ukraine has attacked five of Russia’s ten largest oil-processing plants in recent months.  According to EA Analytics, Russian crude-processing rates averaged 3.51 million bpd in July, the lowest in 24 years, amid damage to Russian energy infrastructure caused by drone and missile attacks from Ukraine. Russian crude processing rates recovered slightly to 3.98 million bpd in September as damaged refineries struggle to come back online.

On the bearish side for crude, the International Energy Agency (IEA) on September 11 warned that high oil prices and restricted oil supply will cause the biggest drop in global oil demand this year since the Covid-19 pandemic.  Despite the projected demand drop, the IEA raised its estimate for this year’s global oil deficit to 1.7 million bpd from last month’s 1.3 million bpd estimate due to the restricted supply caused by the US-Iran war. The IEA said the return of a global oil surplus will be delayed until 2027, later than its previous estimate of late 2026.

On Sunday, OPEC+ agreed to keep oil production quotas unchanged for December.  As a bearish factor for crude, OPEC delegates on August 2 approved their final increase of +188,000 bpd in crude production for September. On paper, the group has restored all 1.65 million bpd of the supply cutback it made in 2023 and said it plans to hold output steady for the rest of the year after the September hike.  However, OPEC+ may struggle to deliver planned production increases amid Middle East shipping disruptions.  OPEC's Sep crude production rose by +1.12 million bpd to 20.71 million bpd. 

Vortexa reported Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -11% w/w to 78.36 million bbl in the week ended October 30, the lowest level in more than 3 months.

Wednesday’s EIA report showed that (1) US crude oil inventories as of October 30 were -5.1% below the seasonal 5-year average, (2) gasoline inventories were -0.9% below the seasonal 5-year average, and (3) distillate inventories were -12.7% below the 5-year seasonal average.  In a bearish factor, US crude oil production in the week ending October 30 rose +0.1% w/w to a new record high of 14.003 bpd.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended October 30 rose by +2 rigs to 462, matching the 1.5-year high of 462 rigs posted on October 9.

On the date of publication, Rich Asplund did not directly have a position 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.