Oil Futures Pullback on Demand Worry

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange nearest to delivery and the Brent contract on the Intercontinental Exchange moved lower early Thursday, consolidating within Wednesday's trade range that included rallies to four-year highs by West Texas Intermediate, Brent and ULSD futures.

Oil futures rallied Wednesday afternoon as U.S. sanctions on Iranian oil set to take effect Nov. 4 approach, and the market questions if production increases by Saudi Arabia, Russia and the United States will be enough to avoid a global supply shortfall.

Heightening the pressure on Tehran, the United States on Wednesday terminated the Treaty of Amity reached with Iran in 1955 that established friendly relations between the two countries. U.S. Secretary of State Mike Pompeo said the decision to terminate the treaty followed Iran's abuse in using the International Court of Justice to attack the United States.

Iran's oil exports are estimated at 1.5 million bpd in September, down 800,000 bpd from an April peak, and could drop another 300,000 bpd or more later in the fourth quarter amid the sanctions. Saudi Arabia and Russia have both ramped up output and said they can produce more, according to media reports, with Saudis producing at a near record high 10.72 million bpd and Russia at a post-Soviet high of 11.347 million bpd.

Saudi Arabian Energy Minister Khalid Al-Falih said the rally in global oil prices is being driven by speculation not actual physical trade flows.

High oil prices are seen dampening global oil demand, with the International Energy Agency expecting the world oil consumption rate to average at a 100.3 million bpd record high in the current fourth quarter. When and if a demand crunch might happen is unclear, although emerging economies suffering from high debt that is further aggravated by a rising U.S. dollar are reeling.

Higher retail gasoline prices are seen to have prompted a slowdown in U.S. gasoline demand in September, with the Energy Information Administration on Wednesday reporting implied gasoline demand averaged 9.318 million bpd during the four weeks ended Sept. 28, down 138,000 bpd or 1.5% against the comparable year-ago period.

EIA also reported U.S. crude production averaged 11.1 million bpd during the final two weeks of the third quarter, with further growth in the fourth quarter seen limited by pipeline constraints.

NYMEX oil futures are also lower following an 8.0 million bbl build in commercial crude supply during the week-ended Sept. 28 reported midmorning Wednesday by the EIA. WTI futures immediately swung to an intraday low on the data finding, but quickly reversed higher and settled at $76.41 bbl, the highest settlement on the spot continuous chart since November 2014.

At 9 AM ET, NYMEX November WTI futures were down $0.51 at $75.90 bbl, and ICE December Brent eased $0.30 to $85.99 bbl. NYMEX November ULSD futures were down 0.7 cents at $2.4302 gallon, with the November RBOB contract 1.05 cents lower at $2.1273 gallon.

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

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