Supply Disruptions Underpin Crude Oil Prices

Crude oil prices rose on Friday despite no fresh attacks by the US and Iran against each other. However, Houthi leader Abdulmalik al-Houthi said Friday there were indications the Saudis were heading toward “comprehensive escalation,” which he said would be met with a fiercer campaign.

Tensions remain high in the Middle East, leading to disruption of global supplies.  In addition to the Houthi blockade of Saudi ports in the Red Sea, the US is maintaining a full maritime blockade of vessels calling at Iranian ports.  Also, Iran continues to menace shipping transiting the Strait of Hormuz.  In addition, diplomatic attempts to reopen the Strait of Hormuz appear to be at an impasse. 

Robust crude supplies in China may reduce Chinese crude purchases in the near term, a bearish factor for oil prices.  China’s crude inventories remain abundant, with supplies falling by only 54 million bbl since early May to around 1.2 billion bbl, according to data from Kpler.

Crude prices also have support as Ukraine intensifies drone attacks on Russian oil infrastructure.  Russian crude production fell to 8.928 million bpd in June, the lowest in 2.5 years, according to monthly OPEC data.  According to EA Analytics, Russian crude-processing rates will average 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.  According to Bloomberg, Ukrainian forces have attacked Russian fuel-producing facilities more than 50 times this year, hitting at least 24 of Russia’s 34 largest refineries. As of the end of June, around 90% of Russian regions have imposed some form of fuel rationing or reported supply issues, as refining capacity has plunged following damage to facilities. The strikes have deepened a nationwide gasoline shortage, with several major refineries shut down and the government banning almost all gasoline, jet fuel and diesel exports.  Russia is the world’s number two diesel exporter, after the US, according to Vortexa. 

Stronger Russian crude exports are also adding to global oil supplies, which is bearish for prices. Data compiled by Bloomberg show the four-week average of Russian crude exports remains above 4 million bpd in the period to July 26 and rose to 4.13 million bpd through June 28, the highest since Russia invaded Ukraine in 2022.  Russia may be boosting its crude exports as the country’s refining capacity has plunged due to damage at its refining facilities from Ukraine’s drone and missile attacks.

As a bearish factor for crude, OPEC delegates said on Tuesday that they expect to pause oil production hikes at its meeting this Sunday, following a final increase of +188,000 bpd in September.  The group already formally agreed to restore about two-thirds of the 1.65 million bpd supply cutback it made back in 2023 and said it plans to raise output targets further and to revive the final portion in three more monthly stages.  On July 5, OPEC+ said it will boost its crude output by 188,000 bpd in August, though that increase might prove difficult amid renewed US-Iran military attacks in the region.  OPEC’s June crude production rose by +2.34 million bpd to 18.75 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days rose +3.5% w/w to 102.84 million bbl in the week ended July 24.

Wednesday’s EIA report showed that (1) US crude oil inventories as of July 24 were -6.4% below the seasonal 5-year average, (2) gasoline inventories were -6.6% below the seasonal 5-year average, and (3) distillate inventories were -8.5% below the 5-year seasonal average.  US crude oil production in the week ending July 24 was unchanged w/w at 13.796 million bpd, just below the record high of 13.862 million bpd posted in the week of November 7.

Baker Hughes reported Friday that the number of active US oil rigs in the week ended July 31 rose by +1 to 451 rigs, just below the 1.25-year high of 452 rigs posted in the week ended July 17.

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