WTI Reverses Higher, Shrugs off USD Gains on Supply Worry

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and the Intercontinental Exchange Brent contract reversed early losses to settle Tuesday's session higher, with the WTI six-month calendar spread widening to a $7.85 bbl nearly one-year high, as OPEC+ supply cuts and drawdowns at the Cushing tank farm in Oklahoma, the WTI delivery point, tighten supply availability.

A combined 1.3 million bpd supply reduction through the end of 2023 by Saudi Arabia and Russia in addition to OPEC+ production quotas will lead to a 1.2 million bpd supply deficit during the fourth quarter, according to the International Energy Agency.

In the United States, strong demand pull for crude oil from foreign buyers has drawn down inventory at Cushing, with stocks at a 22.9 million bbl 14-month low on Sept. 15, according to the Energy Information Administration. During the six-week period through mid-September, Cushing stocks were drawn down 11.738 million bbl, with working inventory at 29.3% of capacity. Cushing crude stocks are expected to have again declined during the week-ended Sept. 22.

On Tuesday, IEA released its Net Zero Roadmap indicating "continued investment is required in existing oil and gas assets and already approved projects," echoing industry leaders, including Saudi Arabian Energy Minister Prince Abdulaziz bin Salman. During an interview on Sept. 18 in Calgary at the World Petroleum Congress, the prince suggested the Paris-based agency had become an advocate for climate issues. Tuesday's comments by IEA acknowledge the need for continued oil drilling, saying "Sequencing the decline of fossil fuel supply investment and the increase in clean energy investment is vital if damaging price spikes or supply gluts are to be avoided."

A tight global supply-demand disposition, which will require inventory drawdowns during the final three months to satisfy consumption requirements, sharply widened the domestic and international crude market structures in September. The widening backwardation not only signals tight supply currently but is a disincentive to build inventory.

Supply worries dominated trader concerns over the effect inflation, interest rates, a United Auto Workers' strike, and the high probability of a government shutdown will have on consumer purchasing power. Tuesday morning, The Conference Board reported the second monthly decline in the U.S. consumer confidence index, which fell more than expected to a four-month low, with the short-term outlook sinking to a level that historically has signaled recession within the next 12 months.

"Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular," said Dana Peterson, chief economist at The Conference Board. "Consumers also expressed concerns about the political situation and higher interest rates."

The U.S. dollar index strengthened for the fourth consecutive session against a basket of foreign currencies on Tuesday, rallying to a 105.930 10-month high settlement, continuing an advance following last week's Federal Open Market Committee meeting in which Fed officials signaled interest rates would remain "higher for longer" to arrest inflation.

Inflation ticked higher in August on higher energy prices, which are poised to further accelerate inflationary pressure in September. Adding to those headwinds are higher home prices, with the Federal Housing Finance Agency reporting Tuesday that its seasonally adjusted House Price Index rose 4.6% during the 12 months ending in July, well above the 3.2% year-on-year increase in June. Shelter costs, which have a long lag in showing up in inflation, have been on the decline. But coupled with higher energy costs and the potential for high labor costs as UAW members seek a 40% wage increase suggests inflation will be enduring.

Through the Fed's dot-plot projections, a majority of officials expect to lift the federal funds rate 25-basis points in the fourth quarter, and to cut the rate, now in a 5.25% by 5.5% target range, twice in 2024, down from four. CME Group's FedWatch tool shows investors continue to believe the Fed will not hike the federal funds rate this year but have adjusted their positions in 2024 that align more closely with a higher for longer interest rate environment.

NYMEX November WTI futures settled up $0.71 at $90.39 bbl, and ICE November Brent ended the session at $93.96 bbl, widening its premium against the December contract to $1.53 bbl. NYMEX October RBOB futures reversed off support at $2.50 to settle Tuesday's session at $2.5622 gallon, up $0.0183, with the November contract trailing the advance, up $0.0132 to $2.5166 gallon.

NYMEX October ULSD futures was the session's outlier, settling down $0.0384 at $3.2238 gallon, with the prompt spread ending at a $0.0525 premium in the backwardated market.

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

Brian Milne