WTI Bounces off 6-Month Lows as Strategic Reserve Draws Signal Tight Market

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- While the ULSD contract fell for the third consecutive session, West Texas Intermediate and RBOB futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session higher. The gains came on early -- if not fleeting -- gains by equities following Friday's stronger-than-expected U.S. employment report that defied evidence of a slowing economy and reports that another drawdown from U.S. Strategic Petroleum Reserves have pressed stockpiles to a fresh 37-year low, underscoring tight market fundamentals.

The Department of Energy on Monday said SPR crude oil fell another 5.3 million barrels (bbl) last week to 464.6 million bbl, the lowest level of emergency stored crude oil since 1985. The reserves, which are intended to be used in case of a supply disruption due to extreme weather, industrial accident, or war, have fallen by more than 130 million bbl during the Biden administration. The Biden administration revealed a plan in July to restock the SPR through fixed, preset pe- barrel prices negotiated with oil companies to incentivize more oil production now, but there is no plan to add crude into emergency reserves until after 2023.

Interestingly, domestic operators reduced the number of active oil rigs last week for the first time since late May, which might suggest falling oil prices and narrowing backwardation are causing producers to scale back on drilling activity. The seven-rig decline last week through Friday reported by Baker Hughes included four rigs deactivated in the prolific Permian Basin in west Texas and New Mexico, where the oil-rig count slipped to 344.

Goldman Sachs this weekend cut its third-quarter price forecast for Brent crude from $140 per bbl to $110 amid slowing economic growth and increasing signs of demand destruction in the world's top three large economies -- the United States, China, and European Union.

In China, crude oil imports rebounded last month at a much slower pace than expected, averaging 8.79 million barrels per day (bpd) for the month -- the second-lowest monthly rate in four years and more than 9% below last year's average. Protracted weakness in China's oil demand is linked to extended COVID-19 restrictions and the government's curbs on economic activity.

In the United States, Friday's U.S. payroll report showing job growth in July at 528,000, more than double expectations for 250,000 new jobs, fueled optimism that the U.S. economy might indeed dodge the recession bullet during the second half of 2022 after technically falling into recession during the first six months of the year, according to current data.

In contrast, the outlook for European economic growth remains dour, clouded by an energy crisis, high unemployment, and protracted conflict in Ukraine. Major European economies are already on the cusp of recession, with Germany reporting no growth in its nominal gross domestic product.

The slowdown is likely to intensify as winter approaches and energy prices rise further in Europe, with several countries on the continent vulnerable to Russia completely cutting off gas flow to the European Union. Russian state-owned energy giant Gazprom earlier this month limited natural gas flow through the Nord Stream pipeline to just 20% of capacity, citing issues with turbines and sanctions, delivering only 33 million cubic meters a day.

On Monday, Dutch Transfer Title Facility natural gas futures climbed above 190 euros/MWh, up 17.34% from a month earlier and 351.21% higher from a year ago. Underpinned by uncertainty over Russian supplies and elevated demand in the EU from scorching hot summer weather, spiking natural gas prices are prompting gas-to-oil switching in power generation.

The energy crisis is having a harsh effect on the United Kingdom. Last week, Bank of England's Governor Andrew Bailey gave a brutally honest assessment of the U.K. economy, projecting a protracted recession that would start in the fourth quarter and last at least through the end of 2023. The BOE said it now sees U.K. inflation peaking at 13.3% in October, well above the 11% previously predicted, and driven particularly by soaring energy prices.

At settlement, nearby month delivery WTI advanced $1.75 to $90.76 per bbl, while international crude benchmark Brent contract for October delivery added $1.73 to $96.65 per bbl. NYMEX September RBOB gained 3.06 cents to $2.8862 per gallon, while NYMEX September ULSD contract declined 3.68 cents to $3.1791 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges