Oil Slips to 4-Day Low

CRANBURY, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange (NYMEX) and Brent crude on the Intercontinental Exchange slipped to four-day lows early Tuesday following Monday's down day and sharp gains prior week, as the latest violence in the Middle East moved to the background, reducing the geopolitical risk premium embedded in oil prices that spiked West Texas Intermediate and Brent crude futures to 36-month highs last week.

Analysts indicate markets have moved into a period of greater volatility amid growing animosity between nations, while a protracted global oil surplus is eliminated. The International Energy Agency late last week projected commercial oil supplies held by the Organization for Economic Cooperation and Development (OECD) 35-country bloc could meet their five-year average by May.

Production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and 10 non-OPEC oil producers, which set their goal of eliminating the OECD surplus above the five-year average, joined strong demand to erase the global supply cushion, even as U.S. oil production rates are at record highs.

Oil demand in China, which would be hobbled by a trade dispute with the United States analysts indicate, grew 350,000 barrels per day (bpd) year-on-year in February, according to the most recent data from OPEC. The cartel projects oil demand in China will expand by 420,000 bpd this year, accounting for 26% of the expected 1.63 million bpd annual increase in world oil demand.

"The strength of China's oil demand remains centered on gasoline and jet fuel usage in the road transportation sector and LPG demand in the petrochemical sector," said OPEC in their most recent Monthly Oil Market Report, with gasoline demand in February up 120,000 bpd or 4.3% from February 2017.

Overnight, China reported first quarter gross domestic product expanded at a 6.8% annual rate that matched the third and fourth quarters' growth rates and market consensus, with consumer spending a key component in driving the expansion. China also reported industrial production increased 6.0% during the first quarter from year prior, which matched expectations.

On Monday, U.S. President Donald Trump put on hold additional sanctions on Russia for its alliance with Syrian President Bashar Assad following the April 7 chemical weapons attack by the Syrian regime on a rebel enclave near Damascus. Earlier this month, the United States imposed sanctions on more than a dozen Russian businesses, government officials and oligarchs for a host of issues, including the attempted assassination of a former spy with a nerve agent in Great Britain. The early month sanctions sparked a selloff in the ruble.

"U.S. sanctions and the collapse in the ruble gives Russia a very good reason to deepen its ongoing cooperation with OPEC. Should OPEC and Russia keep output flat in 2019 as U.S. shale supply bottlenecks emerge, we see tighter global balances," said Bank of America Merrill Lynch in an industry overview. "As such, we move our end of June Brent crude oil target to $80/barrel (bbl), up from $70/bbl prior."

At 9 a.m. ET, NYMEX May WTI futures were down 44 cents at $65.78 bbl, with June WTI near parity ahead of the May contract's expiration at Friday's closing bell. Support is found at $65.47 and $64.06 bbl. ICE June Brent crude was down 49 cents at $70.93 bbl, with support at $70.42 bbl.

NYMEX May RBOB futures were 1.21 cents lower at $2.0278, with support at $2.0235 gallon. NYMEX May ULSD futures were down 1.91 cents at $2.0512 gallon, with initial support at $2.0485 gallon.

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

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