Oil Futures Add to Rally Early Tuesday

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Brent crude futures on the Intercontinental Exchange traded at a new four-year high early Tuesday following a decision on Sunday by Saudi Arabia and Russia not to lift oil output above rates established by a 21-month supply agreement. The international price marker expanded its premium over New York Mercantile Exchange West Texas Intermediate futures, the U.S. benchmark.

A meeting by the Organization of the Petroleum Exporting Countries and non-OPEC oil producers led by Russia aligned in a supply pact reached in late 2016 declined to lift their output above those rates, but agreed to come into compliance with the targets. The group's technical committee determined OPEC and the non-OPEC contingent were under producing by 600,000 barrels per day (bpd) in August.

The increase is too low, according to the market, amid production losses in Venezuela as the country spirals deeper into economic paralysis, and in Libya and Nigeria amid competing warring factions and militant activity, respectively, that has disrupted oil sales. Falling Iranian oil exports due to U.S. sanctions are providing the greatest worry among traders, with Iran's exports down 500,000 bpd from April to August, according to the International Energy Agency.

IEA pegs Iran's oil exports at 1.9 million bpd in August, which are expected to drop much more in the coming weeks as typical buyers of Iranian crude oil steer clear of buying from the Islamic republic amid the U.S. sanctions. An initial round of U.S. sanctions took effect in early August, with a second and more substantial set of sanctions that directly target Iran's oil exports and banking sector set to take effect Nov. 4.

Both Saudi Arabia and Russia have increased their oil production to address shortfalls, although cementing those increases in the OPEC, non-OPEC supply pact created a political dilemma since any change in production goals need unanimous support from members. Iran promised a veto, and said Saudi Arabia, its archrival, and Russia are taking advantage of its vulnerable position.

Separately, the failure to boost production, as demanded last week by U.S. President Donald Trump, also has the market questioning how much spare capacity is available to meet widespread production constraints. IEA recently reported OPEC spare capacity in August at 2.69 million bpd, down 780,000 bpd from July, with the majority of the buffer supply located in Saudi Arabia. Meanwhile, reports indicate Saudi Arabia sold out of its popular Arab light crude for October deliveries, offering customers its Arab medium and heavy grades.

The rally by oil futures could become further inflamed this week as Trump addresses the United Nations General Assembly and chairs a debate on Iran at the UN Security Council. On Sunday, Iran laid blame for a terrorist attack on a military parade over the weekend that left 25 people dead at the feet of the Saudis and United States.

Brent crude futures is now seen reaching $90 per barrel (bbl) in the fourth quarter as U.S. sanctions tighten its grip on Iran's economy and global oil demand is expected at 100 million bpd, and could touch $100 bbl by year's end. Climbing crude costs could dent demand.

The Federal Open Market Committee begins a two-day meeting today and are widely expected to announce a 25 basis point increase in the federal funds rate Wednesday afternoon. The higher interest rate, currently 1.75% to 2.0%, lifts borrowing costs. The U.S. dollar is weaker early Tuesday in index trading, trading near a better-than 10-week low. A weaker greenback boosts WTI futures.

ICE November Brent crude futures were up $0.60 at $81.80 bbl at 9 a.m. EDT, trading near $82.20 bbl -- the highest trade on the spot continuous chart since Nov. 11, 2014, ahead of the contract's expiration Friday afternoon. December delivery is trading at a $0.25 to $0.30 discount to the expiring contract.

NYMEX November WTI futures were $0.30 higher at $72.37 bbl at 9 a.m. EDT, and have since traded as high as $72.69, holding below Monday's better-than-10-week spot high of $72.74 bbl.

The widening Brent premium to WTI futures, trading near $9.50 bbl, reflects the greater affect lost Iranian oil supply will have on Europe, with WTI the U.S. benchmark where U.S. production hovers near record high output. The wide arbitrage is an incentive for foreign buyers to procure U.S. barrels.

NYMEX October ULSD futures, up 1.4 cents at $2.299 gallon, rallied to a $2.3075 gallon three-week high early Tuesday, holding below the $2.3093 September high ahead of the contract's expiration on Friday. November delivery is trading at a roughly 25-point premium to October delivery in the seasonally directed contango market.

NYMEX October RBOB futures were up 0.63 cent at $2.0610 gallon, trading at a fresh 3-1/2-week spot high at $2.0702 gallon, with the November contract trading at a 1.15-cent discount to October delivery.

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

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Brian Milne