WTI oil prices are dipping on a confluence of US domestic factors, and prices in Europe are following suit, with arbitrage traders bidding the commodity down.
But while the US and Europe share several issues in terms of demand – higher inflation, lower consumer spending, repeated central bank rate hikes – the supply pictures in the two regions are diverging and are keeping Brent crude higher in relative terms. However, the current correction is likely to be only temporary. Different supply issues in the two regions will eventually stop prices from dipping further, making the current dip a good entry opportunity.
US oil demand slows down during peak driving season
The typically strong holiday driving season in the US is proving a little bit elusive this year. Words like staycation are making it back into the popular vocabulary as more Americans watch their expenses in the wake of the recent interest rate hikes and higher inflation. Data from the US oil agency EIA showed that demand for oil dropped continuously for at least the last four weeks.
WTI prices have dropped to $95.75/bbl, down from around $110/bbl at the start of July.
But there is some short-term tightness building up on the supply front after an incident at the Keystone pipeline, the pipeline running between Canada and the US. The pipeline operator TC Energy has kept the details of the incident under wraps, only explaining that the pipeline suffered third-party non-operational damage and that repairs will take an unspecified amount of time. Operations have been restricted for the last three days.
Divergence between US and European prices
While Europe faces much the same issues in terms of demand – higher prices, inflation and interest rates dampening demand – sanctions on Russian oil imports are keeping oil prices high and are likely to continue to do so over the coming months. Ironically, sanctions seem to have only made Russian oil imports more complicated rather than stopping them completely as vessels are either transferring the cargo at sea so that the oil can make it into Europe under different flags, or cargos are taken to non-European ports such as the United Arab Emirates. But the looming restrictions imposed on those exports is keeping prices high.The European Commission is now contemplating instating the planned restrictions on imports of Russian oil six months ahead of the initially planned date. The EU is banking on being able to supply itself through alternative routes including from the US, Africa and from the newly operational Kuwaiti Al-Zour refinery, one of the world’s largest new refineries. It remains to be seen if this will be enough to cover the potential shortfall from Russia.
In 2020 Europe imported a total of 2.8 million barrels per day of Russian oil, of which around 0.7 mb/d was by pipeline and over 2 mb/d by sea. In the same year Russia exported 2.1 mb/d of oil to Asia, pumping 0.8 mb/d directly to China via pipeline.
For the moment WTI is trading at $95.50/bbl, down 20% from a June high. After such a sharp correction in a matter of weeks the next move is more likely to be a reversal.
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