Oil Settles At One-Week Highs

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and the Brent contract closest to expiration on the Intercontinental Exchange settled Tuesday's session at one-week highs, as the risk to global oil supply increased following a downed Russian reconnaissance plane in Syria, and ahead of a ministerial meeting in Algiers by the Organization of the Petroleum Exporting Countries and Russia.

The rally ran roughshod over an escalating U.S.-China trade war that could stunt oil demand growth should global economies slow, and ahead of weekly inventory data due out this afternoon and Wednesday morning.

Oil futures rallied off technical support overnight on news a Russian aircraft was shot down by Syrian air defense, which was responding to an Israeli attack. Israel was targeting Iranian military assets in Syria, with Russia and Iran allied with Syrian President Bashar Assad in a brutal years-long civil war. Israel has vowed to not allow Iran to carve out a military presence in Syria, which borders Israel in the north.

Moscow blamed Israel for the lost aircraft and death of 15 service members on board the plane. Israel blamed Syria for the loss of life, but expressed regret for the incident. Moscow and Tel Aviv have developed a close relationship during the Syrian civil war, and the incident doesn't appear to have changed that dynamic.

The incident also comes ahead of the weekend OPEC ministerial meeting when reports indicate Russia will seek a 1.0 million bpd boost in production.

OPEC and 10 non-OPEC oil producers led by Russia agreed in late 2016 to collectively reduce their oil output to drain an oversupplied market. Late in the second quarter, the producers had cut more than they committed to because of involuntary supply outages in Libya, Nigerian and Venezuela. There was also concern Iranian oil exports would decline as U.S. sanctions on the Islamic nation took effect. Under pressure from oil consuming countries including India and China, as well as U.S. President Donald Trump, Saudi Arabia and Russia agreed to hike production in June. Late last week, U.S. Energy Secretary Rick Perry echoed their pledge.

Still, Saudi Arabia has been reluctant to increase production if there are no buyers, with July production down 200,000 bpd from June, although up about 125,000 bpd in August at 10.412 million bpd. Reports have also surfaced that Saudi Arabia would be pleased if global oil prices were closer to $80 bbl.

Meanwhile, Iranian crude production dropped to a 27-month low in August at 3.584 million bpd, as sanctions impede oil sales. Another set of U.S. sanctions take effect in early November that directly target Iranian oil exports. Combined with declining output in Venezuela amid years of mismanagement and a collapsing economy, global spare capacity has narrowed sharply.

Separately, the market shrugged despite new tariffs imposed in the U.S.-China trade war. Monday night, Washington slapped $200 billion in tariffs on imported Chinese goods that takes effect Sept. 24, with a separate $50 billion in tariffs having taken effect in July. Tuesday, Beijing responded, placing $60 billion in tariffs on U.S. imports.

The Shanghai Composite Index increased, up 1.8% at 2,700 this afternoon after falling to a nearly four-year low on Monday, with the Dow Jones Industrial Average rallying more than 200 points to 26,285.

The U.S. dollar did slide, tumbling to a nearly eight-week low in index trading, with a weaker dollar lending upside support for West Texas Intermediate futures.

Domestically, the American Petroleum Institute will release supply data for the week-ended Sept. 14 at 4:30 PM ET to paying subscribers, and the Energy Information Administration will publish its data set at 10:30 AM ET Wednesday.

Dominick Chirichella, EMI DTN Director of Risk Management, estimates U.S. commercial crude supply was drawn down 2.5 million bbl during the week profiled, gasoline increased 200,000 bbl, and distillate fuels gained 1.5 million bbl during the second week of September.

Year-on-year supply comparisons will be effected by Hurricane Harvey caused outages. U.S. gasoline supply fell below the five-year average last year at this time because of shut refining operations, while crude stocks increased at a quicker than usual pace.

On Monday, Genscape reported a 2.3 million bbl draw in Cushing crude stocks occurred during the week profiled that if realized would press inventory at the Oklahoma tank farm to minimum operating levels below 22.0 million bbl. Cushing is the delivery location for the NYMEX WTI futures contract.

NYMEX October WTI futures settled up $0.94 at $69.85 bbl ahead of its expiration Thursday afternoon, with November delivery ending at a $0.26 discount to the expiring contract. ICE November Brent gained $0.98 to a $79.03 bbl settlement.

NYMEX October ULSD futures settled 2.93 cents higher at $2.2357 gallon, and the October RBOB contract gained 2.81 cents with a $2.0049 gallon settlement.

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

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