RBOB Leads Oil Futures Rally

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled at new and fresh highs on their respective spot continuous charts Monday, shaking off early session weakness on strong demand, while chilly relations between the United States and China over trade are warming following back-and-forth tariff threats earlier this month.

The upside push off early April lows also continues as geopolitical risk has intensified in the second quarter, embedding a premium in crude prices, while production cuts from the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers led by Russia drain oversupplied inventory held by the 35 country bloc Organization for Economic Cooperation and Development. These developments are more than offsetting record high U.S. crude production that continues to grow, evidenced by climbing rig deployments in the U.S. oil patch and commercial hedging programs.

Two data points released by the Energy Information Administration in their most recent and closely watched Weekly Petroleum Status Report highlights the market's bullish fundamental disposition, including a weekly record high in U.S. implied gasoline demand at 9.857 million bpd during the second week of April. The record was set well in advance of peak driving demand in the United States during the summer months.

EIA also reported total U.S. commercial inventory of crude and oil products declined below the five-year average as of April 13, accomplishing a goal set by OPEC in the production agreement to reduce OECD commercial inventory to their five-year average. The United States is a member of OECD.

During their meeting on Friday, OPEC said it was investigating new metrics in how to gauge the global oil market's disposition, while committing with Russia to maintain their two-year production agreement through end year, and potentially into 2019.

News that U.S. Treasury Secretary Steven Mnuchin is considering a trip to China for trade talks suggests fear of a trade war between the world's two largest economies that sparked a selloff in the opening days of the second quarter would be averted through negotiation. International Monetary Fund chief Christine Lagarde had warned last week ahead of a meeting between the IMF and World Bank that a U.S.-China trade war could undermine global economic growth which is being driven by trade and increased investments.

NYMEX May RBOB futures settled up 2.78cts at a $2.1237 gallon nearly eight-month spot high, with its forward curve nearing a flip into seasonal backwardation—a bullish market structure.

NYMEX May ULSD futures settled up 1.79cts at $2.1409 gallon, the highest settlement on the spot continuous chart since Dec. 2, 2014. Interestingly, ULSD's forward curve is in backwardation. The former heating oil contract would typically be in a contango market structure this time of year following the heating season.

"Such a shift may be best explained by the expanding globalization of energy demand," said Alan Levine, chairman of Washington, D.C. brokerage Powerhouse. "Within the developed economies, weather and heating patterns appear to be shifting. In particular, demand for heating oil has softened, thus minimizing the effect of unusual weather, particularly in the first quarter of the year."

NYMEX June West Texas Intermediate crude futures settled up 24cts at $68.64 bbl, a nearly 41-month high on the spot continuous chart. WTI futures notched today's gains despite a rallying U.S. dollar, which traded at a better-than seven-week high.

ICE June Brent crude settled up 65cts at $74.71 bbl, a three-year, five-month spot high, and has since topped $75.00 in ongoing trading this afternoon. Brent widened its premium to WTI futures to $6.07 bbl at settlement, the widest the spread has been since the first week of 2018.

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

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