Crude, products prices spike as market rebound continues

Crude oil futures spiked July 21 back above the $70/b threshold as commodities and stock markets continued to rebound from the big July 19 selloff that was triggered by concerns of rising crude production and potential demand weakness from the rapidly spreading COVID-19 delta variant.

Traders largely decided the selloff -- the biggest one-day plunge in crude since April 20, 2020 -- was an overreaction as solid demand growth is expected for energy markets.

Front-month NYMEX WTI gained $3.10 to settle at $70.30/b on the first day of the September contract trading at the front of the curve, while ICE September Brent rose by $2.88 to settle at $72.23/b.

As for refined products, NYMEX August RBOB jumped 8.52 cents to settle at $2.2167/gal, and August ULSD increased by 7.43 cents to $2.0870/gal.

Crude oil had climbed throughout June and early July -- trading to a seven-year high July 6 -- before coming back down on production and pandemic concerns, including a roughly $5/b plunge July 19 on the new OPEC+ deal to hike output this year and through 2022, as well as on the rising fears of the delta variant. Stock markets also tumbled, but mostly recovered their losses over the past two days.

"Crude prices are soaring as risk appetite returns and energy traders believed a 15% pullback over the past two weeks was excessive given how tight market conditions remain," said Edward Moya, senior market analyst for OANDA.

The energy rally July 21 overcame any perceived bearishness from US crude inventories ending their eight-week streak of draws for the week ended July 16, according to the US Energy Information Administration.

However, from a slightly more bullish view, US gasoline and distillate stocks dipped in the week ended July 16 along with an unexpected decline in refinery utilization as implied fuel demand rose a bit, US Energy Information Administration data showed July 21.

Total motor gasoline stocks dropped by about 100,000 barrels last week and are roughly even with the five-year average for this time of year. Likewise, distillate fuel supplies fell by 1.3 million barrels for the week ended July 16 -- about 4% below the five-year average.

Implied motor gasoline demand in the US ticked up slightly but still averaged out nearly flat at 9.3 million b/d, although distillate demand jumped by about 9% from the prior week. Energy traders have increasingly focused on US fuel demand as a key driver in oil prices over commercial crude stocks.

The declines in fuel stocks came along with refinery utilization dipping again from 91.8% of capacity the week prior down to 91.4%, the EIA said.

Crude build ends streak

US commercial crude inventories jumped by 2.1 million barrels for the week ended July 16 -- halting the eight-week streak of declines -- leaving total commercial stocks at 439.7 million barrels, about 7% below the five-year average, the EIA data showed.

A notable reason for the crude gain can be found in import and export volumes. Commercial crude imports rose by 875,000 b/d from the prior week, while crude exports plunged by 1.56 million b/d from a recent high down to 2.46 million b/d. So products demand likely is swaying crude prices even more.

Crude stocks fell in the Cushing, Oklahoma storage hub by 1.3 million barrels, but rose nearly everywhere else in the country.

"A big build in the Gulf Coast stemmed from an almost 40% drop in exports," Moya said. "Imports rose to the highest levels since last July."

As Mizuho Securities analyst Robert Yawger noted, "The import/export dynamics appear to reflect the narrowing of the arb." He added, "The difference between imports and exports is at its widest level since December."

At the same time, US crude production remained stagnant for the week at 11.4 million b/d after previously rising throughout July, the EIA said.

There are still some modest concerns of rising US production volumes, but most of the focus is on OPEC+.

The new deal allows OPEC and its allies to ease production cuts by 400,000 b/d each month starting in August, amounting to a 2 million b/d total increase by the end of the year. The deal also extends the OPEC+ supply management pact to the end of 2022, from its previous expiry of April 2022.

The United Arab Emirates -- the source of the previous OPEC+ stalemate -- will receive a 332,000 b/d boost to its reference production level, from which quotas are determined, starting in May 2022. But Saudi Arabia and Russia also get 500,000 b/d baseline increases each, while Iraq and Kuwait will receive 150,000 b/d hikes, in a surprise compromise.

These extra volumes next year come in addition to the Saudis planning to unwind their surplus voluntary cuts.