DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange registered higher settlements Tuesday, with the July West Texas Intermediate crude contract gaining a little more than $1 at expiration, as oil futures were bolstered by persistent travel demand despite historically high fuel prices, although contracts pared greater gains traded earlier in the session.

Oil futures advanced alongside rallying equities, which plunged late last week on recession fears, with the Dow Jones Industrial Average having fallen below 30,000 for the first time since January 2021 on Friday (June 17) while the S&P 500 Index fell into a bear market. DJIA rallied 641.47 points to 30,530.25 Tuesday, and the S&P 500 were 89.95 points higher at 3,764.79. Equities trading in the United States, along with normal trading for NYMEX oil futures, were closed on Monday for the Juneteenth federal holiday.

The U.S. dollar slipped 0.27% to a 104.211 settlement in index trading Tuesday.

July WTI futures expired with a $1.09 gain at $110.65 per barrel (bbl), although paring an advance to a $112.47 intraday high, with August futures narrowing its discount to the now expired contract to $1.13 with a $109.52 bbl settlement -- the narrowest prompt spread since late April.

ICE August Brent futures settled $0.52 higher at $114.65 bbl, trimming a gain to $116.25.

Oil products futures advanced Tuesday but frittered away sharp gains reached early in the session, with NYMEX July RBOB futures settling fractionally higher at $3.7945 gallon after trading as high as $3.9450 gallon. NYMEX July ULSD futures pared an advance to $4.5418 gallon with a $4.3584 gallon settlement, up 1.86 cents from Friday.

Oil futures moved higher early in the session after AAA projected the strongest demand for road travel for the upcoming July 4 holiday on record at 42 million people despite retail gasoline prices averaging on either side of $5 gallon.

"Earlier this year, we started seeing the demand for travel increase and it's not tapering off. People are ready for a break and despite things costing more, they are finding ways to still take that much needed vacation," said Paula Twidale, senior vice president of AAA Travel.

Garrett Golding, senior business economist in the research department at the Federal Reserve Bank of Dallas, sees the potential for even higher fuel prices.

"Though daily national average prices recently eclipsed $5 a gallon, there may be room for prices to rise much higher based on prior episodes, when consumers experienced, and to some extent, withstood such prices," he said in a paper released today.

Golding noted the price advance for oil products have outpaced those for crude oil following refinery closures during the COVID-19 pandemic, with about 1.5 million barrels per day (bpd) of capacity now out of service. The scramble in supply chains earlier this year triggered by Russia's unprovoked invasion of Ukraine on Feb. 24 has further tightened the global oil-supply demand balance, with gasoline prices up 34% since December and diesel prices spiking 53% in 2022.

"This [diesel] price surge is most acutely felt by freight and agricultural end users, increasing the cost of bulk transportation, deliveries and food production," said Golding. "For a farmer who plants and harvests 1,000 acres of corn this year using conventional tilling, at an average of 5 gallons of diesel per acre, the fuel bill for that crop would be $27,500 today versus $16,400 in 2021."

Nonetheless, the tightness in the global oil market is not abating. Darren Woods, ExxonMobil CEO, earlier today at the Qatar Energy Forum in Doha, said he expects a "fairly tight" global oil market for the next three to five years because of a lack of industry investment during the pandemic.

"Without an adequate supply response arriving in the near term from either crude oil production or refining capacity, demand destruction is likely the only variable that can eventually cause the fuel price surge to slow and reverse," said Golding.

According to the New York Federal Reserve Bank's dynamic stochastic general equilibrium model, there is an increasing likelihood for economic contraction, with their model "considerably more pessimistic than it was in March," said the bank's research team on Friday.

The model finds the likelihood of a soft landing as the Federal Reserve embarks on a monetary tightening path to rein in inflation, which refers to U.S. gross domestic product staying positive for the next 10 quarters is only 10%.

"Conversely, the chances of a hard landing -- defined to include at least one quarter in the next 10 in which four-quarter GDP growth dips below -1 percent, as occurred during the 1990 recession -- are about 80 percent," said the federal bank's research team.

Brian L. Milne can be reached at brian.milne@dtn.com