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Oil slumped on the concern of global recession and the Iran deal

calendar 09/08/2022 - 19:55 UTC

Oil (WTI-Aug Exp) made a 6-month low around 87.01 on the concern of synchronized global recession and the high probability of an imminent Iran nuclear deal, which may pave the way for around +1 mbpd additional supply in the global market. On early Tuesday, oil bounced back on Russian supply disruption to Europe through a key pipeline in Ukraine due to the failure of transit fee amid EU sanctions. Russian oil supplies to central Europe via Ukraine (the southern leg of the Druzhba pipeline) had been halted citing issues relating to transit fees.

According to Russian transportation firm Transneft, Ukraine has halted Russian oil pipeline flows to Central Europe, reportedly because sanctions prevented it from accepting transit fees, jeopardizing crude supply to countries like Hungary, Slovakia, and the Czech Republic.

Russian oil pipeline operator Transneft said:

·         Ukrtransnafta stops pumping Russian oil through the Druzhba pipeline to Hungary, the Czech Republic, and Slovakia

·         Druzhba flow halted as sanctions prevent transit pay

·         Oil flows via the northern Druzhba leg are unaffected for Germany

·         August transit fee paid and returned due to sanctions

·         Transneft is working on alternative ways to pay the Druzhba fee

Earlier oil was also undercut on a potential additional +1 mbpd supply from Iran as the nuclear deal may be imminent. The EU submitted a final text to revive the 2015 deal late on Monday, awaiting approval from U.S. and Iran. A potential deal could boost Iran’s oil exports by at least 1 mbpd or about 1% of the global supply in six months. The swiftly organized indirect negotiations between Iran and U.S. have reportedly made good progress, according to diplomats participating in the talks, after the EU presented a final text on the revival of the JCPOA.

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Overall, in August (till day) oil plunged around -6.95% after -14% slumps in June and July on the concern of synchronized stagflation on both sides of the Atlantic coupled with Pacific (U.S.-Europe-China/India).

On Tuesday, the U.S. EIA said in its latest STEO report:

Global liquid fuels

The August Short-Term Energy Outlook (STEO) is subject to heightened uncertainty resulting from Russia’s full-scale invasion of Ukraine, how sanctions affect Russia’s oil production, the production decisions of OPEC+, the rate at which U.S. oil and natural gas production rise, and other contributing factors. Less robust economic activity in our forecast could result in lower-than-forecast energy consumption.

We forecast the spot price of Brent crude oil will average $105 per barrel (b) in 2022 and $95/b in 2023.

U.S. crude oil production in our forecast averages 11.9 million barrels per day (b/d) in 2022 and 12.7 million b/d in 2023, which would set a record for most U.S. crude oil production in a year. The current record is 12.3 million b/d, set in 2019.

We estimate that 98.8 million b/d of petroleum and liquid fuels were consumed globally in July 2022, an increase of 0.9 million b/d from July 2021. We forecast that global consumption of petroleum and liquid fuels will average 99.4 million b/d for all of 2022, which is a 2.1 million b/d increase from 2021. We forecast that global consumption of petroleum and liquid fuels will increase by another 2.1 million b/d in 2023 to an average of 101.5 million b/d.

The U.S. retail price for regular grade gasoline averaged $4.56 per gallon (gal) in July, and the average retail diesel price was $5.49/gal. We expect retail gasoline prices to average $4.29/gal in the third quarter of 2022 (3Q22) and fall to an average of $3.78/gal in 4Q22. Retail diesel prices in our forecast average $5.02/gal in 3Q22 and $4.39/gal in 4Q22.

U.S. refineries average 93% utilization in 3Q22 in our forecast, as a result of high wholesale product margins. Elevated prices for gasoline and diesel reflect refining margins for those products that are at or near record highs amid low inventory levels.

We forecast that OPEC crude oil production will rise by 2.4 million b/d to an average of 28.7 million b/d in 2022 and will further increase to 29.3 million b/d in 2023. Crude oil production from OPEC members averaged 26.3 million b/d in 2021.

We expect global consumption of liquid fuels will grow by 2.2 million b/d in 2022 and by 2.0 million b/d in 2023.

Global oil inventories in the forecast rise by 0.8 million b/d in 2022 and remain unchanged in 2023. Inventory builds in 2022 reflect the rising production of liquid fuels in the United States and OPEC, paired with slowing liquid fuel consumption growth.


Bottom line:

U.S. EIA sees balancing oil market amid lower demand due to synchronized global stagflation/recession and higher U.S. and OPEC (Saudi Arabia and UAE) production. Looking ahead, whatever may be the narrative, technically oil now has to sustain over 85 for any meaningful recovery towards 115-130; otherwise, expect 60 levels in the coming days.

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