Oil Pares Losses after Saudi Signal Limited Spare Capacity

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- While ULSD futures extended higher for the sixth consecutive session, firming Monday on news Russia plans to halt natural gas flows to the European Union later this month, West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled with modest losses, moving off intrasession lows after Saudi Arabia's energy minister suggested OPEC+ may need to cut production amid a growing disconnect between the physical and futures markets.

Oil futures were selling off sharply in early trading on concern over lost demand amid an economic slowdown in China and growing worry over the possibility of a global recession, and a belief that oil exports would expand amid a resurrected nuclear agreement that ends U.S. sanctions on Iranian oil. Saudi Energy Minister Prince Abdelaziz Bin Salman called that logic wrongheaded, indicating the physical market is tighter than futures prices suggest, and would tighten further later this year during the winter months.

"The markets are ignoring OPEC+ limited spare capacity...futures prices today don't reflect the underlining fundamentals of supply and demand, which may require OPEC+ to tighten production when it meets next month to consider output targets," said Abdelaziz during an interview with Bloomberg News.

On Aug. 3rd, OPEC+ agreed on a small production increase of 100,000 bpd for September, noting limited capacity among the group of 23 producers. The group's next meeting is scheduled for Sept. 3rd.

Brent crude, the international price benchmark, slid below $93 to an intrasession low of $92.36 bbl before paring losses as the prince's comments circulated, settling the session $0.23 lower at $96.48 bbl. U.S. crude benchmark WTI contract for September delivery expired $0.54 lower at $90.23 bbl, with the October contract moving to a modest $0.13 premium with a $90.36 bbl settlement.

In contrast, NYMEX September RBOB futures declined 12.63 cents to a two-week $2.8912 gallon settlement low as the summer driving season has less than two weeks to go, while the September ULSD contract added 7.57 cents for a $3.7762 gallon settlement.

In currency trading, the euro fell to a discount against the U.S. dollar on Monday for the second time this year as the Eurozone continues to face rising inflation while it prepares for a potential energy crisis this winter amid concerns of Russia squeezing the supply of natural gas. A combination of soaring power prices and rising inflation forced some industrial operators in Europe to announce shutdowns this summer, clouding the outlook for the European economy and global supply chains. The industrial shutdowns ahead of the winter months could spell an inflation disaster for the European continent, with consumer prices already rising at a record pace of 8.9%.

The euro's slump today comes after Russian state-owned energy firm Gazprom announced it would once again shut off the supply of natural gas to western Europe for three days to carry out maintenance -- a move that could thwart the region's plan to fill up its gas reserves ahead of the critical winter season. Not surprisingly, markets are skeptical Gazprom would resume gas flows through the key pipeline after the maintenance is completed.

Faced with the possibility of reduced or zero gas imports from Russia, German Chancellor Olaf Scholz stepped up efforts to secure alternatives. Scholz and his deputy and energy minister, Robert Habeck, landed in Montreal, Canada, late Sunday to sign a deal with the Trudeau government to supply clean hydrogen to Germany along with discussions over future supplies of liquified natural gas.

"There are a number of potential projects that are in the books for which there has never been a strong business case," Trudeau said. "It needs to make sense for Germany to important LNG from the east coast."

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

Liubov Georges