Oil Futures End Day, Week Lower

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery traded on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange registered a modest decline Friday while down on the week, as media surveys show crude production by the Organization of the Petroleum Exporting Countries increased in July, countering supply disruptions from OPEC members Venezuela, Libya and Iran.

Trading was volatile throughout the week, with a two-day selloff through Wednesday giving way to a rally Thursday, as a tug-of-war in market sentiment continues. Those who are bearish point to climbing oil production from OPEC and Russia and near record high output in the United States that they see offsetting involuntary output losses by several other producers, and think a heightening trade battle between the United States and China will cut into global oil demand.

Those bullish note a string of supply disruptions, and believe there is limited spare capacity to offset additional unexpected supply outages. They highlight the ongoing plunge in Venezuela's production and lower Iranian oil exports due to U.S. sanctions expected to accelerate the decline over the coming months.

OPEC oil production jumped 340,000 bpd in July to 32.66 million bpd, according to an S&P Global Platts survey released Friday, which found output by Saudi Arabia at a nearly two-year high at 10.66 million bpd, up 240,00 bpd from June.

The survey found oil production from Venezuela dropped 100,000 bpd in July to 1.24 million bpd, the lowest output rate for the South American nation since a worker strike in late 2002, early 2003. Iranian production declined 79,000 bpd to an 18-month low at 3.72 million bpd as U.S. sanctions start to bite. Libya's production was down 30,000 bpd to a 15-month low at 670,000 bpd.

News also broke late week that China would not cut its purchases of Iranian oil despite U.S. sanctions which take effect Nov. 4, although agreed to not increase Iranian oil imports. On Monday, U.S. sanctions on Iran's purchase of U.S. dollars take effect that will likely hinder Iran's oil sales, with oil trading globally in U.S. dollar denominations.

Tehran said in July that it would disrupt oil movement through the Strait of Hormuz, where 30% of world oil supply flows daily, if its oil sales declined because of U.S. sanctions. This weekend, Iran is scheduled to conduct a naval exercise in the strait.

Some see a heightening trade war between the United States and China cutting into oil demand, with state oil company Sinopec indicating it won't buy U.S. crude oil in September. China announced "it intends to impose new retaliatory tariffs on U.S. liquefied natural gas (LNG) in addition to retaliatory tariffs on crude oil, refined products, and petrochemical," said the American Petroleum Institute in a news release this afternoon.

Domestically, crude stocks at the Cushing supply hub in Oklahoma continue to decline, drawn down consistently since mid-May to press stocks to 22.4 million bbl -- the lowest supply level at the hub since November 2014. Crude stocks at Cushing are down 14.8 million bbl or 39.8% since May 12 when the drawdowns began, while down 26.6 million bbl in 2018.

Cushing stocks are near minimum operating levels estimated between 16 million and 22 million bbl, with the Energy Information Administration reporting working capacity at Cushing at 77.505 million bbl.

Cushing serves as the delivery location for NYMEX West Texas Intermediate futures.

NYMEX September WTI futures settled down 47cts at $68.49 bbl after consolidating within Thursday's trade range, while posting a modest 20cts loss against prior Friday. WTI futures swung to a $66.92 six-week spot low Thursday, holding long-term support at $66.89.

ICE October Brent futures settled down 24cts at $73.21 bbl in consolidation trade, while on the week ended $1.08 or 1.5% lower on a spot continuous basis, with the September contract expiring Tuesday. Brent crude flipped into contango in July after trading in a bullish backwardated market structure since September 2017.

NYMEX September RBOB futures settled down a fractional 0.26cts at $2.0655 gallon, while on the week RBOB futures ended down 9.64cts or 4.5% on the spot continuous chart following the expiration of the August contract on Tuesday. September RBOB is a summer gasoline contract, however gasoline demand consistently falls in September from August.

NYMEX September ULSD futures settled down 0.49cts on the session at $2.1269 gallon, while 2.83cts lower on the week on a spot continuous basis following the August contract's expiration this week. Low distillate stocks, which EIA shows totaled 124.2 million bbl on July 27, down 25.2 million bbl or 16.9% against year prior, are expected to support higher ULSD futures as we move closer to the fourth quarter.

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

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