Crude Oil Boosted by Concerns about Tight Worldwide Supply

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are up slightly into the close on Wednesday. After feeling pressure earlier in the week on demand worries, traders shifted momentum to the upside on the back of ongoing concerns about tight worldwide supply.

Traders are still worried about the stronger dollar weighing on foreign demand and China’s relentless lockdowns against the spread of coronavirus sapping demand, but those two issues seemed to be offset by Russia’s move to cut off gas shipments to two European nations.

The markets were also underpinned by another drawdown in U.S. distillate and gasoline inventories according to a key weekly government report.

At 20:46 GMT, June WTI crude oil is trading $102.05, up $0.35 or +0.34%. July Brent crude oil is at $104.95, up $0.34 or +0.33%. The United States Oil Fund ETF (USO) settled at $76.37, down $0.09 or -0.12%.

Strong Greenback Weighs on Foreign Demand for Dollar-Denominated Oil Products or Does It?

The U.S. Dollar soared to a multi-year high against a basket of major currencies on Wednesday, led mostly by a plunge in the Euro as investors grew increasingly concerned with energy supply and a potential recession in the region.

On paper, a strong dollar is supposed to weigh on demand for dollar-denominated crude. It may not be obvious, but crude oil prices have been somewhat capped since the dollar turned bullish at the end of March. Nonetheless, Europe needs oil and the U.S. is willing to supply it to them even if it means the Europeans are going to be paying premium prices.

Blame this one on Putin and his war machine. Furthermore, the European Commission is close to deciding whether to ban the import of Russian energy products. If they do then the U.S. will become a key supplier and it won’t even matter that the Euro is tanking. The Europeans have to find oil somewhere.

Weekly EIA Report Highlights Global Demand for US Energy Products

Although crude inventories rose by 692,000 barrels in the week to April 22 to 414.4 million barrels, short of analysts’ expectations in a Reuters poll for a 2 million-barrel rise, the markets were supported because of a drop in U.S. fuel stocks.

Distillate stockpiles, which include diesel and heating oil, fell by 1.4 million barrels in the week to 107.3 million barrels, driving those stocks to their lowest level since May of 2008.

Why did distillate stock piles fall? Because the U.S. keeps exporting products like diesel and heating oil.

Distillate stocks have steadily declined in part due to heavy demand overseas for U.S. products, which has grown since Russia’s invasion of Ukraine. Russia is the largest exporter of refined products and numerous countries have banned imports of Russian oil, leading to a hunt for other barrels.

Europe needs diesel fuel for the trucks that supply the Euro Zone with products. Europe also needs heating oil and coal as substitutes for natural gas that may become short-supplied.

Demand for heating oil is also likely to increase because Moscow has halted gas supplies to Bulgaria and Poland for rejecting its demand for payment in roubles. Conditions could even worsen if Russia decides to stop supplying other countries with gas.

Short-Term Outlook

It looks like Russia is trying to challenge the sanctions imposed on it by most of the world by cutting off two countries from their gas supply. This could have a domino effect that could reach all the way to the gas pumps in the United States.

Although the government tried to push gasoline and diesel prices lower by releasing crude oil from the strategic supply, the strategy may not work if the U.S. keeps selling the energy products to Europe. Who wouldn’t want to do that especially since the oil companies are probably getting paid in expensive dollars?

So far this year, the United States has exported 6.3 million barrels of refined products daily, up 25% from the same period a year ago.

How is that helping to depress domestic gasoline prices?