Crude oil prices surged further in June 2022 for the second consecutive month, with ICE Brent and NYMEX WTI first-month contracts averaging nearly 5% higher on a monthly average basis despite a relatively volatile month and tumbling financial markets.
EXECUTIVE SUMMARY
Crude oil prices surged further in June 2022 for the second consecutive month, with ICE Brent and NYMEX WTI first-month contracts averaging nearly 5% higher on a monthly average basis despite a relatively volatile month and tumbling financial markets. The market was driven by a strong supply/demand outlook in the short term and geopolitical developments in major producing regions. The ICE Brent front-month contract increased by $5.54 in June 2022, or +4.9%, to average $117.50 / bbl, and NYMEX WTI front-month contract rose by $5.08, or +4.6%, to average $114.34 / b. Since the start of the year, ICE Brent was $39.71, or +60.9%, higher at $104.94 / bbl, while NYMEX WTI was higher by $39.55, or +63.6%, at $101.77 / bbl, compared with the same period a year earlier.
The oil market rose firmly in the first half of June 2022, hitting their highest since March 2022, as oil demand outlooks improved after China started to gradually lift some COVID-19 restrictions and new daily cases fell significantly, and the summer driving season showed an optimistic start in the US. Oil prices were boosted by robust summer driving demand outlooks amid tight refined oil product supplies, specifically in the Atlantic Basin, and strong gains in refined products prices and margins. Meanwhile, supply disruptions in several regions, including Eastern Europe, Latin America and North Africa and worries about supply cuts in the North Sea due to strikes also supported oil futures market. Traders also weighed the European Union Member States' agreement to impose gradual sanctions on Russian crude oil and refined product imports, which could further tighten the global oil supply. Oil prices were also buoyed by data from the EIA showing three consecutive weeks of decline in US crude oil stocks, though the declines occurred despite large releases of crude from the Strategic Petroleum reserves (SPR).
However, oil prices reversed the uptrend in the second half of June 2022 and dropped sharply in highly volatile trading, undermined by broader selloffs in major financial markets amid concerns about a slowdown in global economic activity and potential lower world oil demand, which outweighed ongoing concerns about global oil supply and tight oil product markets. Market sentiment deteriorated after major central banks, including the US Federal Reserve, increased interest rates to curb inflation, which raised worries about a slowdown in global economic growth. Market volatility remained elevated due to uncertain oil market fundamental outlooks and uncertainty regarding the impact of aggressive monetary policies from central banks on the global economy. Oil prices were also pushed down by a surge in the US dollar’s value, which rose to its highest level since 2002 against a basket of currencies. Oil futures prices recouped some losses later in the month after major stock market indexes stabilized and investors turned their focus on strong oil fundamental.
Crude oil prices continued to slide down during the first two weeks of July 2022 as well, pressed by escalating fears the US may be pushed into a recession as the Federal Reserve hike rates aggressively to combat inflation. US inflation rose in June 2022 to its highest in four decades while high US gasoline prices are starting to take their toll on consumption. At the same time, Libya is restarting its oil exports and production from all of its fields after reaching a deal with protesters, ending months-long blockade that had halved the OPEC nation’s output that eased supply-side concerns on the market. A stronger dollar and continued COVID-19 outbreaks in China also added to pressure on the oil market during the month, as well as weak economic data in China, showing Chinese GDP growth at the slowest pace since the country’s first COVID-19 outbreak. In such circumstances, the oil market saw two hugely volatile weeks of trading, which saw prices at one point wipe out all of their gains since Russia invaded Ukraine with ICE Brent ended a week below $100 a barrel for the first time since early April 2022. At the lowest point of the downturn, on July 14, 2022, the ICE Brent front-month contract sank below $95.0 / bbl and the NYMEX WTI front-month contract dipped below $92.0 / bbl. However, oil prices pared some earlier losses during the third week of July 2022, boosted by dollar weakness and expectations that the U.S. Federal Reserve won't raise interest rates by a full percentage point at its next meeting to combat inflation. Also, the market again focused on tight supplies as U.S. President Joe Biden's trip to Saudi Arabia did not yield any pledge from the top OPEC producer to boost oil supply.
Nevertheless, both the ICE Brent and the NYMEX WTI front-month contracts showed a strongly negative dynamics within the period under report, ending the period in the red zone for the first and the second times over recent 6 months, respectively. The ICE Brent active contract softened by $6.94 relative to the level of June 17, 2022, or -6.1%, to settle at $106.18 / bbl as of July 20, 2022. The NYMEX WTI near-month contract tumbled more severely within the period and lost roughly $10.0 in contrast with the level of June 17, 2022, or -9.2%, to settle at $99.50 / bbl as of July 20, 2022.
Total crude oil production of the OPEC reversed to the downside in June 2022 after 13 consequent months of expansion, mainly due to a drop of the output in Libya and Nigeria, and declined by 120 thsd as against with the volume of May 2022, or -0.4% MoM. Recall that the OPEC+ was to increase its aggregate output by 432 thsd bbl / d within the month, according to the agreed production adjustment schedule. So, the cartel obviously failed in June 2022 to deliver its part of the overall planned output growth. Nevertheless, despite negative monthly dynamics, the volume of the total OPEC production still was higher than the average level of last three pre-pandemic months (December 2019 – February 2020) and close to the average level for this month of a year over recent 5 years. On an annual basis, total crude oil output of the cartel showed a profound growth in June 2022, along with preceding months. The production ramped up in the month under review by 2.2 mln bbl / d relative to the level of May 2021, or +8.3% YoY, that was, however, again slower than in the previous months. The total output of the OPEC kept on expanding in yearly terms in June 2022 throughout 14 months in a row. On one hand, the most considerable monthly fall of the output in the month under review was registered in Nigeria. The extraction of crude oil tumbled there severely by 100 thsd bbl / d in compare to the previous month or serious -7.7% MoM, the worst monthly drop of the output in the country over recent 2 years. The output of crude oil continued to decrease in Nigeria over consequent 5 months and, in result, sank to its new minimum level on records equal to just 1.2 mln bbl / d. It is worthwhile to note that the average level of the output for the corresponding month of a year over recent 5 years was equal to 1.67 mln bbl, or almost 40% higher. Libya experienced a rapid contraction of its crude oil production in June 2022 as well. From a monthly dynamics standpoint, the extraction of crude oil shrank in the country by 90 thsd bbl / d, or -11.8% MoM. In June 2022, the output went down in Libya within consequent 4 months and tumbled to its minimum value within recent 1 year equal to just 670 thsd bbl / d. On the other hand, the most formidable monthly rise of the output of oil in the month under review was demonstrated in the U.A.E. The production of crude oil increased in this state by 90 thsd bbl / d in compare to the level of the preceding month, or +2.9% MoM. As for monthly dynamics, the output experienced a growth in the U.A.E. for the second consequent month and came up in June 2022 to its new maximum score of 3.19 mln bbl / d since April 2020.
The most recent 30th OPEC and non-OPEC Ministerial Meeting, which was held on June 30, 2022, brought a little new information to the crude oil market. The group only reconfirmed the earlier production adjustment plan and the monthly production adjustment mechanism approved at the 19th and 29th Meetings and the decision to adjust upward the monthly overall production for the month of August 2022 by 648 thsd bbl / d. The same upward adjustment was agreed at the previous Meeting for the month of July 2022. Also, along with many preceding Meetings, the group reiterated the critical importance of adhering to full conformity and to the compensation mechanism. The next 31st OPEC+ meeting is scheduled for August 3, 2022.
Total oil production around the globe continued to grow in June 2022 for the second month in a row and increased by another 715 thsd bbl / d in contrast with the level of May 2022, or +0.7% MoM. In result, the volume of the global output climbed up within the month to its new highest level since March 2020 and, therefore, outnumbered the local highs of February and March of 2022. It means that sanctions imposed on Russia by western states haven’t brought any prolonged visible effect on the supply side of the global oil market yet. So, the fears regarding a sharp drop of the supply were, in fact, too excessive. In yearly terms, total production of oil around the world again was considerably higher in June 2022 than it was a year ago. This time, the yearly growth of the output was equal to 4.51 mln bbl / d, or +4.7% YoY, the 15th consequent month of global supply expansion on an annual basis. On a single country level, the most considerable monthly expansion of the production in June 2022 was observed in Russia, which produced considerably less oil during two preceding months due to western sanctions and corresponding logistic problems. So, the extraction of oil jumped in Russia in June 2022 by 510 thsd bbl / d in compare to the level of May 2022, or +4.9% MoM. It was the second month of production growth in a row and the fastest monthly increase of the output in the country over recent 12 months. On the other hand, the most material monthly decline of oil output in the month under review was recorded in the other Ex-USSR states. The aggregate production of this group of countries collapsed in June 2022 by as much as 326 thsd bbl / d in contrast with May 2022, or severe -10.8% MoM, due to continuous problems with oil export from Kazakhstan via Caspian Pipeline Consortium (CPC) marine terminal located in Russia’s Novorossiysk. It was the worst monthly dynamics of the output over recent 5 years, so the volume of the combined output of the states sank to its record low over recent 5 years as well, equal to just 2.70 mln bbl / d.
According to the weekly US DOE data, primary domestic oil production in the US, counted as the sum of crude oil and NGLs production, increased considerably in June 2022 pound for pound the volume of the previous month. The monthly expansion was equal to solid 559 thsd bbl / d, or +3.2% MoM, that is substantially higher than the monthly growth of the overall oil output in the country during the month. Although it was only the second consequent month of primary domestic oil production broadening, the volume of the primary output grew in the US to its new maximum print since April 2020 equal to 17.91 mln bbl / d. On an annual basis, the primary domestic oil production in the US delivered even more profound positive dynamics in June 2022, along with preceding months. More exactly, it expanded by nearly 1.7 mln bbl / d in compare to the one year ago level, or still solid +10.4% YoY, though not so fast as in the month prior. From an annual performance standpoint, the primary output in the US continued to build up within 14 months in a row. The monthly expansion of the primary domestic oil production in the US in June 2022 was caused by growth of both production of crude oil and NGLs.
Total production of shale oil kept on growing in the US in June 2022 for the second consecutive month (according to the revised data) and increased further by 340 thsd bbl / d as against with the volume of May 2022, or solid +3.8% MoM. The output achieved its new maximal level of 9.2 mln bbl since March 2020 and, therefore, got over the threshold of 9.0 mln bbl for the first time since the start of the pandemic. It is worthwhile to note that the output of shale oil in the US was higher than the level of June 2022 for only 6 months in history, from October 2019 till March 2020. Also, it was the quickest monthly expansion of the production in the country for more than a year. In yearly terms, the output of shale oil in the US again delivered a strong increment in June 2022, along with preceding months. The production increased in the month under consideration by more than 1.0 mln bbl / d versus the level of a year ago, or solid +12.4% YoY, a much faster yearly growth than a month ago. On an annual basis, the production of shale oil in the US proceeded growing in June 2022 for 14 consequent months. In absolute terms, the most essential monthly increase of shale oil output in June 2022 was recorded on the deposit of Permian. The production on the field built up modestly within the month by 186 thsd bbl / d, or +3.5% MoM. In June 2022, the output kept on growing on Permian within consequent 4 months and achieved its new peak volume on records equal to 5.57 mln bbl / d. In relative terms, the most material monthly expansion of production of shale oil in the month under review was showed on Bakken deposit. The production on Bakken field increased in June 2022 by 86 thsd bbl / d in compare to the level of the previous month, or dramatic +8.8% MoM. It was the second consequent month of broadening of the production and the most rapid monthly growth of the output on the field within the preceding year.
According the most recent IEA monthly report, rarely has the outlook for oil markets been more uncertain. A worsening macroeconomic outlook and fears of recession are weighing on market sentiment, while there are ongoing risks on the supply side. For now, weaker-than-expected oil demand growth in advanced economies and resilient Russian supply has loosened headline balances. In its latest update the World Bank warned that Russia’s invasion of Ukraine and its effects on commodity markets, supply chains, inflation and financial conditions have accentuated the slowdown in global economic activity. The bank now expects world GDP growth to ease to 2.9% in 2022 from 5.7% in 2021. The IMF has cautioned that a recession next year cannot be ruled out, given the elevated risks. So, the deceleration of economic activity is adding further uncertainties to IEA’s oil demand forecast but, for now, the agency only modestly trimmed its outlook for 2022 and 2023. High fuel prices have started to dent oil consumption in the OECD, but this was largely countered by a stronger-than-expected demand rebound in emerging and developing economies led by China as it starts to emerge from COVID-19 lockdowns. All in all, global oil demand is now expected by the IEA to expand by 1.7 mln bbl / d in 2022 and 2.1 mln bbl / d next year, when it reaches 101.3 mln bbl / d.
Total commercial stocks of crude oil and petroleum products continued to build up in OECD states in April 2022 for the second month in a row, following 13 consequent months of depletion. However, the monthly expansion was less impressive than the preliminary data showed and equal to just 14.0 mln bbl comparing to the level of the previous months, or +0.5% MoM. Despite to the continuous positive monthly dynamics, the volume of the inventories remained in the month under review deep below both the average and the minimal levels for the corresponding month of a year over last 5 years. In annual terms, total commercial stocks of crude oil and petroleum products in OECD states demonstrated a strongly negative performance in April 2022, along with several preceding months. More exactly, the volume of the stockpiles tumbled in the month under consideration by 280.9 mln bbl in compare to the one year ago level, or -9.6% YoY, again a certain slowdown of the yearly decline, comparing to the previous month.
According the preliminary IEA assessments, global observed inventories of oil rose by a modest 5 mln bbl in May 2022 as a sharp increase in non-OECD crude stocks was offset by lower OECD stocks and oil on the water. At once, total commercial stocks of crude oil and petroleum products in the OECD rose within the month by 15.2 mln bbl to 2.691 bn bbl, still 301.3 mln bbl below the 2017-2021 average, helped by the release of 32.1 mln bbl of government stocks. The early data for June 2022 show total OECD stocks built by another 22 mln bbl.
Total stockpiles of crude oil and petroleum products reversed to the upside in the US in June 2022 after four month of depletion in a row and expanded by 9.5 mln bbl comparing to the month prior, when the inventories tumbled to their new record low throughout last 5 years equal to 740.1 mln bbl, or +1.3% MoM. Nevertheless, the volume of the stocks in the US remained well below the lower bound of the range for the corresponding month of a year for recent 5 years. On an annual basis, total inventories of crude oil and petroleum products in the US, conversely, demonstrated a very significant deterioration in June 2022, along with preceding months, and tumbled by 81.4 mln bbl relative to June 2021, or -9.8% YoY. The inventories in the US kept on exhausting on an annual basis for 15 months in a row.
Despite to the positive monthly dynamics of the overall crude oil stocks in the US, crude oil inventories in the Cushing storage in Oklahoma (the basis for NYMEX WTI crude oil futures) continued to fall in June 2022 for the second month in a row and dried up further by 3.8 mln bbl in compare to the month prior, or -15.1% MoM. In result, the volume of the stocks in the storage sank to its new minimum level over recent 5 years equal to just 21.3 mln bbl and, therefore, remained well below the lower border of the range for the corresponding month of a year over last 5 years. In yearly terms, the crude oil inventories in Cushing delivered a strong negative performance in June 2022 as well, along with previous months. The stockpiles tumbled in the month under review by 19.0 mln bbl relative to the level of June 2021, or dramatic -47.2% YoY, a certain acceleration of the decline relative to the previous month. It was the 15th month in a row of Cushing stocks depletion in yearly terms.
Total floating inventories of crude oil worldwide continued to exhaust in June 2022 for the second month in a row and went down by 9.4 mln bbl compare to the level of May 2022, or -9.8% MoM. In result, the volume of the stocks sank to its lowest level over recent 12 months, below the threshold of 90.0 mln bbl. Due to two consequent months of negative dynamics, the world offshore crude oil stockpiles moved in June 2022 below the average level for the corresponding month of a year over last 5 years, for the first time since the year start. However, annual performance of the total floating inventories of crude oil around the world still was positive in June 2022, the second consequent months of yearly expansion. The stocks expanded by 6.4 mln bbl as against with the level of June 2021, or +7.9% YoY. Anew, it was the most substantial yearly growth of the figure for more than a year. The most significant monthly exhaustion of crude oil floating inventories in absolute terms in June 2022 was recorded in Asia. The volume of the stocks diminished there by 7.0 mln bbl in contrast to the previous month, or -12.5% MoM. Although it was just the second consequent month of decline in row, the stockpiles slid down to their minimal mark for last 2 years equal to 49.38 mln bbl.