Oil Futures Gain to End Thursday

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled higher Thursday on increasing expectations that the United States would withdraw from the nuclear accord with Iran that would thrust sanctions upon a country that holds the world's fourth largest oil reserves, further tightening a global oil market that is reaching balance after years of oversupply.

NYMEX oil products also rallied on strong demand for fuels in the United States, despite bearish weekly gasoline data released Wednesday by the Energy Information Administration, with the ULSD contract rallying to a fresh 38-month high on the spot continuation chart at $2.1670 gallon. EIA reported a 2.6 million bbl decline in U.S. distillate fuel stocks for the week-ended April 20 that lowered inventory to a 40-month low at 122.7 million bbl, down 28.2 million bbl or 18.7% from a year ago.

Nearly a month into the second quarter, oil futures have surged after shaking off worry over a possible trade war between the United States and China on a tightening global oil supply-demand disposition and heightened risk to supply amid geopolitical tension.

After declining earlier in the week on the possibility of restructuring the 2015 Iranian nuclear accord proposed by French President Emmanuel Macron on Tuesday during his state visit to the White House, crude futures have since advanced as U.S. President Donald Trump is still expected to decertify the agreement at a May 12 deadline that would re-impose sanctions on Iran. Macron fed that speculation, saying he expects Trump to withdraw from the agreement for domestic reasons. Analysts estimate sanctions on Iran could cut Iranian crude exports by 350,000 bpd.

Add to this concern a reported new strategy employed by Houthi rebels in Yemen against Saudi Arabia that targets Saudi oil facilities, renewed fighting in Libya, and a quasi-like death spiral in Venezuelan oil production, and oil prices are ramping high.

U.S. oil production is at record highs and continues to climb, countering the geopolitical threat somewhat, with U.S. crude exports at a record high of 2.331 million bpd last week. U.S. crude exports continue to grow since restrictions were lifted in December 2015, while production cuts by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries provide greater opportunity to grab market share.

This dynamic is observed by a widening Brent-West Texas Intermediate spread, with Brent settling at a $6.55 bbl premium over the U.S. benchmark, the widest premium of 2018.

NYMEX June WTI futures settled up 14cts at $68.19 bbl, while ICE June Brent settled 74cts higher at $74.74 bbl. A rallying U.S. dollar, which reached a 3-1/2 month high in index trading today, limited the upside in WTI futures.

The June Brent contract expires at Monday's (4/30) closing bell, with the July contract ending up 65cts at $73.88 bbl.

NYMEX May ULSD futures settled at a fresh 38-month spot high at $2.1600 gallon, up 2.4cts ahead of the contract's expiration on Monday, with the June contract gaining 1.81cts at $2.1416 gallon.

ICE Brent, NYMEX WTI and ULSD futures are all in backwardation, a bullish market structure indicating supply tightness at the front end of the forward curve. NYMEX RBOB futures is set to flip into backwardation with the May contract expiration Monday afternoon, with gasoline demand strongest during the summer months.

Supply tightness can be observed through EIA data which shows total U.S. commercial crude and oil products supply slipped below the five average in mid-April. The International Energy Agency earlier this month said commercial oil supply held by the 35-country bloc Organization for Economic Cooperation and Development could erase surplus supply above their five-year average in May, with the United States an OECD member.

NYMEX May RBOB futures settled up 2.26cts at $2.1123 gallon, with the June contract ending 2.17cts higher at $2.1166 gallon.

Oil futures were lent upside support by a rallying equities market, with the Dow Jones Industrial Average up more than 200 points and the S&P 500 Index nearly 30 points higher heading into the close.

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

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