Prices bounce back
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US fuel inventory drawdown counteracts China COVID-19 lockdown fears
Alaska North Slope crude surged $5.44 May 11 to close at $111.79 per barrel, while West Texas Intermediate vaulted $5.95 to close at $107.51, and Brent gained $5.05 to close at $107.51.
The gains coincided with a report that U.S. fuel inventories plunged as the busy summer driving approached. Total motor gasoline inventories decreased by 3.6 million barrels for the week ending May 6, settling 5% below the five-year average for the time of year, the Energy Information Administration reported May 11. Distillate fuel inventories decreased by 0.9 million barrels for the period, ending at 23% below the five-year average for the time of year.
May 11 price action was a reversal of an asset sell off that began Monday May 9, taking U.S. and international stocks sharply lower, along with cryptocurrencies, gold, silver and other commodities. U.S. equity markets were spooked by concerns over how aggressively the Federal Reserve would raise interest rates to calm inflation.
China’s economy weighed on oil prices after a May 9 New York Times report that growth in the country’s exports slowed significantly in April, according to customs data.
Li Keqiang, the Chinese premier, warned over the weekend that the current state of the nation’s jobs market was “complicated and grave,” the Times said.
Oil prices have been kept in check by demand fears arising from a COVID-19 lockdown in Shanghai affecting millions of workers, which has snarled manufacturing in the area and reduced demand for fuels.
Beijing has reported an increase in COVID-19 cases as well, raising concerns that the Chinese government would put the nation’s capital under similar lockdowns under its strict zero COVID policies.
The Straits Times reported May 9 that Beijing is tightening curbs across the city, ordering millions of people to work from home and stay within their districts, in what city residents are saying amounts to a de facto lockdown.
Beijing has reported dozens of cases each day, with 915 cases reported since April 22 when a cluster was detected at a Chaoyang district school, it said. Non-essential businesses such as cinemas, museums, and karaoke parlors; all schools except universities; and some parks were ordered to close.
Oil prices fell approximately 9% over the two trading days leading up to May 11.
ANS slid $6.44 May 9 to close at $109.84, as WTI dropped $6.68 to close at $103.09, and Brent slid $6.45 to close at $105.94.
The losses continued May 10 as ANS fell $3.49 to close at $106.35, WTI fell $3.33 to close at $99.76, and Brent fell $3.48 to close at $102.46.
Oil closed Friday May 6 at a six-week high as members of the European Union moved closer to banning Russian oil imports by the end of the year in response to Russia’s military aggression in Ukraine.
On May 6, ANS gained $1.39 to close at $116.26, WTI gained $1.51 to close at $109.77, and Brent gained $1.49 to close at $112.39.
ANS rose 64 cents May 5 to close at $114.89, as WTI rose 45 cents to close at $108.26, and Brent rose 76 cents to close at $110.90.
As Petroleum News went to press early May 12, WTI and Brent traded more than 1% lower than their May 11 closing prices.
High oilfield costs may hinder productionRapid inflation in the U.S. oil patch is crimping CAPEX budgets for oil producers, just as the industry is attempting to ramp up production to meet recovering demand.
The EIA ratcheted down its forecasts for U.S. oil production by 0.8% to 11.9 million barrels per day in 2022 and 12.85 million bpd in 2023, in the face of its estimates that global petroleum demand will increase by 730,000 bpd to 20.51 million bpd in 2022.
Domestic crude oil production for the week ending May 6 fell 100,000 barrels to 11.8 million. Lower 48 production was unchanged, but Alaska production dropped slightly.
Drillers said they are experiencing spiraling prices on everything from rigs and workers to diesel fuel and frac sand, Bloomberg reported May 5. CEOs are being forced to increase annual spending plans to preserve crude and natural gas output targets.
The market for new equipment and skilled workers to man rigs and truck equipment across the oil fields has quickly tightened after years of limited investment, according to a May 2 Economist report.
“There is starting to be a little bit of a competition for (fracking) fleet,” said Chris Wright, chief executive of Liberty Oilfield Services. “Not everyone that wants a fleet or wants an extra fleet today, frankly, is going to get one.”
Meanwhile, investment advisor Bryan Rich suggests that inflation is likely heading higher, despite cooler CPI numbers reported May 11, and oil is at the crux of the disparity.
The 8.3% 12-month change in prices for April was cooler than the 8.5% inflation in the March report, but oil had a lot to do with the cooler number, Rich said in Pro Perspectives May 11.
“If we look at the change in price of crude from February to March, it was 18%; from March to April, crude prices were down 6%,” Rich said, adding, “Not so coincidently, Biden announced a record release of oil from the U.S. Strategic Petroleum Reserve on March 31.”
Rich said oil prices were manipulated lower, but now have returned to pre-SPR announcement levels.
“This oil price driver of inflation isn’t going anywhere,” he said. “And with the strong ex-food-and-energy inflation number this morning, we should expect higher inflation prints from here.”