Crude prices drop but hold steady near $70/b threshold

Crude oil prices fell Aug. 13 but still held steady near the $70/b threshold as fears of economic and supply-chain slowdowns bubbled up as a result of China closing a major port terminal.

While global crude demand remains on an uneven upswing, the rapid spread of the coronavirus delta variant has dented most demand projections for the rest of 2021, and now Asian outbreaks, especially in China, are triggering new economic restrictions. Most notably, China's zero-tolerance approach to COVID-19 led to the closure of its Meishan terminal at the world's third-busiest port -- the Ningbo-Zhoushan port -- which is expected to disrupt supply chains globally.

Front-month NYMEX WTI lost 65 cents, down to a $68.44/b settlement for the week, while front-month ICE Brent traded lower by 72 cents to $70.59/b.

As for products, NYMEX September RBOB dropped 1.28 cents to settle at $2.2626/gal, while September ULSD dipped 2.60 cents to $2.0779/gal.

"China has made it perfectly clear that it will take all measures -- no matter how seemingly extreme -- to contain any breakouts," said Craig Erlam, senior market analyst for OANDA. "What that means for the rest of the world is more supply disruptions in the months ahead, which could mean more bottlenecks and higher costs."

Erlam noted that even a small outbreak in China is enough to put downward pressure on crude prices. "Should we see more evidence of these kinds of strict measures being imposed, we could see that [crude oil] support come under significant pressure," he added.

S&P Global Platts Analytics said Aug. 13 that -- if volatility remains contained -- front-month ICE Brent should hold above the $70/b support level, which is the most likely expectation. Traders have tested support for the $70/b threshold while assessing the impact of rising coronavirus cases on crude oil demand.

"This makes the market somewhat vulnerable to a downshift in expectations and rise in volatility, but for now, the key support levels have held," Platts Analytics noted.

The spread of the delta variant has caused front-month NYMEX WTI to plunge from the nearly $74/b level seen at the end of July down to a recent low of about $66/b, but prices have since rebounded on optimism that the global vaccine rollout will ultimately prevent the strictest of economic lockdowns around the world.

Still, the International Energy Agency Aug. 12 lowered its estimate of 2021 demand growth to 5.3 million b/d from 5.4 million b/d, and cut its second-half 2021 demand estimate by 600,000 b/d to 98.15 million b/d. The IEA pointed to a 120,000 b/d drop in July demand because of the coronavirus resurgence in China, Indonesia and elsewhere in Asia.

From Russia with crude love

At the same time, global crude production is rising. While most of the focus on growing OPEC+ production is on Saudi Arabia and the core OPEC nations, Russia also is expected to hit all-time highs in crude and condensate production in the coming months, according to a new report Aug. 13 from Rystad Energy.

Russia is on track to hit a new crude and condensate high of 11.6 b/d of oil equivalent in July 2022 -- above the December 2018 record of 11.5 million boe/d -- and then grow to a new peak of 12.2 million boe/d by mid-2023 with Rosneft leading the way, Rystad said.

Counting crude oil alone, Russia should match its record high of 10.7 million b/d from April 2020 by May 2022 and keep rising to 11.3 million b/d by mid-2023, Rystad said, before declines in mature production trigger small dips.

Fred takes aim at Florida and vicinity

In the near term, offshore Gulf of Mexico oil and gas producers are keeping an eye on Tropical Depression Fred, which is expected to strengthen into a tropical storm later Aug. 13 and head into the eastern Gulf and near Miami on Aug. 14, according to the National Hurricane Center.

The far-western projected path of Fred cuts near the edge of Shell's Appomattox field, a 175,000 boe/d large platform that began production in 2019. The hub is the first to have produced from the emerging Norphlet play where Shell has been a leader in recent years with a handful of discoveries.

Shell said Aug. 13 it is monitoring the storm, but has not made any changes to its operations or offshore personnel.

Also, due south from the Alabama-Mississippi area -- the western edge of Fred's "cone of uncertainty" -- are two Occidental Petroleum-operated production hubs, Marlin and Horn Mountain. Fred is projected to make landfall in the Florida panhandle as a tropical storm, which could have winds of up to 73 mph.