Tightness in Global Supplies Pushes Crude Oil Prices Sharply Higher

November WTI crude oil (CLX26) is up +3.06 (+3.22%) today, and November RBOB gasoline (RBX26) is down -0.793 (-2.43%).

Crude oil and gasoline prices are mixed today, with crude up sharply at a 3-week high and gasoline falling to a 2-week low.  Escalating hostilities in the Middle East, which are disrupting regional energy supplies, are supporting crude prices.  Crude gains accelerated, and gasoline fell after weekly EIA crude inventories unexpectedly declined and gasoline supplies unexpectedly increased.

Disruption to Middle East energy supplies is supporting crude oil.  Yemen's Houthi rebels continue to launch drone and missile attacks across Saudi Arabia, including oil infrastructure.  Also, Iranian attacks on shipping attempting to transit the Strait of Hormuz have increased in recent weeks, threatening a rebound in energy supplies from the Middle East

Goldman Sachs estimates there's a $24-a-barrel risk premium in crude oil prices due to the Middle East conflict.  However, if Europe releases half the diesel it has announced from reserves, fair value prices could fall by about $11 a barrel.

Surging freight costs to ship crude out of the Middle East due to Iranian attacks on ships in the Strait of Hormuz are bullish for crude prices.  The cost to ship oil from the Middle East to China jumped to $1.4 million a day last week, the most on record. 

Higher Saudi crude output is bearish for crude prices.  Saudi Arabia said its Sep crude production rose by 2 million bpd (+40% m/m) to 8.732 million bpd, recovering from a 36-year low in August. 

Despite attacks on tankers in the Strait of Hormuz, more crude is leaving the Middle East, easing global supply concerns.  Shell Plc said oil flows out of Hormuz have increased to about 80% of prewar levels.

Another bearish factor for crude was Saudi Aramco’s action last Monday to cut the price of its Arab Light crude to Asian buyers by $5 a barrel below a regional benchmark for November delivery, a wider cut than the expected $5 a barrel increase.

The advances by the Houthi rebels to take territory along the Red Sea in Yemen are also contributing to concerns about tighter oil supplies from the Middle East.  Last month, the Houthis captured a pair of islands near the Bab-al-Mandeb Strait.  That followed their seizure of Perim Island and the Red Sea port city of Mokha at the southern end of the Red Sea, putting the group in a stronger position to attack ships.  Since the closure of the Strait of Hormuz, Saudi Arabia has pivoted to the Red Sea to export most of its oil over the past two months.  However, escalating tensions with the Houthis have disrupted that route. 

The US and Iran remain at odds over key issues, including control over the Strait of Hormuz. Iranian President Pezeshkian recently said that Iran won’t allow freedom of navigation through the Strait of Hormuz while sanctions and a US blockade remain in place.

Ukraine has intensified drone attacks on Russian oil infrastructure, curbing Russian crude production and exports.  Ukraine attacked Russian fuel-producing plants 15 times in September and 22 times in August, targeting five of Russia’s ten largest oil-processing plants.  According to EA Analytics, Russian crude-processing rates averaged 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. Russian crude processing rates recovered slightly to 3.98 million bpd in September as damaged refineries struggle to come back online.

On the bearish side for crude, the International Energy Agency (IEA) on September 11 warned that high oil prices and restricted oil supply will cause the biggest drop in global oil demand this year since the Covid-19 pandemic.  Despite the projected demand drop, the IEA raised its estimate for this year’s global oil deficit to 1.7 million bpd from last month’s 1.3 million bpd estimate due to the restricted supply caused by the US-Iran war. The IEA said the return of a global oil surplus will be delayed until 2027, later than its previous estimate of late 2026.

On October 4, OPEC+ agreed to keep oil production quotas unchanged for November.  As a bearish factor for crude, OPEC delegates on August 2 approved their final increase of +188,000 bpd in crude production for September. The group has now restored all 1.65 million bpd of the supply cutback it made in 2023 and said it plans to hold output steady for the rest of the year after the September hike.  However, the planned OPEC+ production increases may be difficult to achieve amid persistent US-Iran military attacks in the region.  OPEC's Sep crude production rose by +1.12 million bpd to 20.71 million bpd. 

Vortexa reported on Monday that crude oil stored on tankers that have been stationary for at least 7 days fell -9.7% w/w to 86.27 million bbl in the week ended October 9.

Today’s weekly EIA report was mixed for crude oil and products.  On the positive side, EIA crude inventories unexpectedly fell by -8.56 million bbl versus expectations of a +150,000 bbl build.  Also, EIA distillate stockpiles fell -2.5 million bbl, a larger draw than expectations of -1.7 million bbl.  On the negative side, EIA gasoline supplies unexpectedly rose +3.5 million bbl versus expectations of a -911,000 bbl draw.  Also, crude inventories at Cushing, the delivery point of WTI futures, rose by +1.86 million bbl to a 5-month high.

Today's EIA report showed that (1) US crude oil inventories as of October 9 were -2.4% below the seasonal 5-year average, (2) gasoline inventories were -4.2% below the seasonal 5-year average, and (3) distillate inventories were -11.7% below the 5-year seasonal average.  US crude oil production in the week ending October 9 fell -2.1% w/w to 13.679 million bpd, falling from a record high of 13.979 million bpd the week of October 2.

Baker Hughes reported last Friday that the number of active US oil rigs in the week ended October 9 rose by +6 to a 16.5-month high of 462 rigs.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.