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ANS holds above $100
WTI plunges below $90 on China COVID-19 lockdowns and Fed rate hawkishness Steve Sutherlin Petroleum News
Despite a significant downdraft in oil prices due to demand fears, Alaska North Slope crude held its ground above the $100 per barrel level to end the month of August. ANS fell $2.80 Aug. 31 to close at $101.36, while West Texas Intermediate fell $2.06 to close at $89.55 and Brent fell $2.82 to close at $96.49.
(See chart for this story in the online PDF.)
The losses came atop steep declines Aug. 30 that saw ANS drop $4.49 to close at $104.16, as WTI plunged $5.37 to close at $91.64 and Brent abruptly relinquished its tenuous perch above $100, plummeting $5.78 to close at $99.31.
Oil followed global equities markets lower as investors fretted over potential interest rate hikes in the United States and the European Union. The Federal Reserve has raised rates four times in 2022 for a total of 2.25 percentage points, and markets are anticipating a third consecutive raise of 0.75% at the Fed’s September meeting.
The European Central Bank is also reportedly eyeing the same rate of increase for its upcoming meeting after consumer prices leapt 9.1% from a year ago in August.
Exchange rates are a drag on prices also. Oil, priced in dollars, is less affordable for holders of foreign currency as the Dollar Index hit a 20-year high of 109.44 points Aug. 29.
Adding to the worries of traders, China is imposing a spate of new draconian COVID-19 lockdowns as it continues to enforce a zero COVID policy that has taken the steam out of the country’s economic growth prospects for 2022. The country is also struggling with high temperatures and drought, as well as shaky real property markets.
On Aug. 29, the city of Shenzhen closed the world’s largest electronics market of Huaqiangbei and suspended public transport in the area, CNN reported.
China’s woes have played a significant role in lowering prices, Harry Altham, energy analyst for EMEA & Asia at StoneX Group in London told Reuters Aug. 31. “There are fears of demand destruction across the West as interest rates rise and inflation concerns grip Western economies.”
Bullish news on U.S. oil and gasoline demand failed to overcome the bearish sentiment.
U.S. commercial crude oil inventories for the week ending Aug. 26 fell 3.3 million barrels from the week prior, to 418.3 million barrels - 6% below the five-year average for the time of year, the U.S. Energy Information Administration reported Aug. 31. The Strategic Petroleum Reserve was drawn down 3.1 million barrels to 450 million barrels over the week. A year ago, the SPR stood at 621.3 million barrels.
Total motor gasoline inventories decreased by 1.2 million barrels for the week, settling 7% below the five-year average for the time of year, the EIA said.
The specter of escalating political unrest in Iraq also added to the possibility that oil prices might vector higher.
Protests flared up in Iraq Aug. 30, after powerful Shiite Muslim cleric Muqtada al-Sadr announced his resignation from politics, CNBC reported Aug. 31.
“While Iraqi production is usually fairly resilient to unrest, the current political environment is extraordinarily toxic and poses a considerable risk to the oil sector,” Fernando Ferreira, Rapidan Energy Group director told CNBC.
Ferreira said that the power struggle between Shia factions in the country is far from resolved, adding that civil unrest will remain a recurring risk to oil markets.
“Prices could rally $5-10 on Iraqi disruptions, possibly more as low liquidity is driving bigger swings than usual,” he said.
Rally fades As of Aug. 29, oil markets were in rally mode, buoyed by comments by Saudi Energy Minister Prince Abdulaziz bin Salman the previous week suggesting that the Organization of the Petroleum Exporting Countries and its allied exporting nations would consider cutting production to stabilize markets if oil prices continued to fall.
ANS jumped $3.60 to close at $108.64 on the day, while WTI gained $3.95 to close at $97.01 and Brent leapt $4.10 to close at $105.09.
On Aug. 26 ANS rose 10 cents to close at $105.04, WTI rose 54 cents to close at $93.06 and Brent rose $1.65 to close at $100.99.
ANS fell $2.01 Aug. 25 to close at $104.94, as WTI fell $2.37 to close at $92.52 and Brent fell $1.88 to close at $99.34.
From Wednesday to Wednesday, the ANS Aug. 31 closing price of $101.36 was $5.58 below its close of $106.94 on Aug 24. As of Aug. 31, ANS carried a premium of $4.87 over Brent.
$120 in the pipeline Goldman Sachs Global Head of Commodities Jeff Currie thinks oil is likely to exceed $120 per barrel later in 2022, as energy shortages cropping up around the world impact the crude market.
In markets such as Europe and China, energy shortfalls are likely to push consumers toward oil-based fuels, a bullish factor for crude prices, Currie said in an interview with CNBC Aug. 30.
A delay or avoidance of a recession could spark a massive jump in crude prices, he said.
“Historically, every time the macro markets, like the yield curve, try to price in a recession and you don’t get the recession in the U.S. - like what will probably happen - oil rallies 80% to 100% after that,” he said.
Global supply is tight, and shortfalls are possible in almost every region, Currie said. Outside of the UAE and Saudi Arabia there is little spare capacity in the system.
“The U.S. is the only region in the world that’s relatively well positioned in terms of having adequate energy supplies,” he said.
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