Oil Futures Settle Lower Wednesday

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Brent crude on the Intercontinental Exchange settled lower for a second straight session Wednesday.

Traders remained downbeat over the outlook of oil demand following Monday's news that China's economy in 2018 grew at the slowest pace since 1990, and the International Monetary Fund revised lower its forecast for world economic growth for 2019, with the U.S./China trade dispute a catalyst in both cases. Analysts suggest China's economy is worse than the 6.6% annualized growth rate stated for 2018, with U.S. tariffs on Chinese imports seen worsening what some indicate was already a vulnerable economy.

Lower oil futures also come as world leaders and business elites continue to meet in Davos, Switzerland, where pessimism over the global economic outlook abounds, generating a string of bleak headlines. Domestically, analysts are largely in line that commercial crude stocks were drawn down during the week-ended Jan. 18, although expectations varied widely. Overall, a 750,000 barrels (bbl) draw is near market consensus. Oil products inventory in the United States is again expected to have increased last week, with distillate fuel stocks seen up about 500,000 bbl. Gasoline stocks are seen to have increased by 2.5 million bbl for the week profiled.

U.S. gasoline inventory has increased sharply in recent weeks, up 29.315 million bbl during the six weeks ended Jan. 11 to 255.565 million bbl—the highest level of commercial gasoline stocks since late February 2017.

Although gasoline supply builds this time of year when demand is weakest, a drop in U.S. exports to Mexico is seen to have amplified the weekly build rate in recent weeks. A reported decline in U.S. gasoline exports to Mexico follows a crackdown on fuel theft launched by Mexico's new president, Andres Manuel Lopez Obrador, who shut pipelines from product terminals to retail stations in late December. Pemex, Mexico's state-owned oil company, has said fuel theft has cost the company as much as $3.4 billion annually.

By shutting the pipelines however, AMLO, as the Mexican president is known by, created a logistical nightmare that has backed up gasoline deliveries at Mexican ports while creating fuel shortages across large portions of Mexico, writes George Baker and Sam Davis in a Turner, Mason and Company blog on Tuesday. The situation has reduced gasoline demand in Mexico, and forced a cut in U.S. gasoline exports to the country.

More than half of U.S. gasoline exports have been sent to Mexico, as the country contends with falling oil production and inefficient refining operations that are running well below nameplate capacity. Monthly EIA data shows U.S. refiners exported 621,000 barrels per day (bpd) of conventional gasoline to Mexico in October 2018, the most recent data available, just shy of the 629,000 bpd record high reached in November 2017.

Nymex February RBOB futures was Wednesday's loss leader, settling down 1.58 cents at a $1.3857 gallon one-week low, with February ULSD futures down 1.25 cents with a $1.8886 gallon settlement.

Nymex March West Texas Intermediate futures settled down $0.39 at $52.62 bbl, although continues to hold above the 50-day moving average on the spot continuous chart at $51.16 bbl. ICE March Brent futures ended the session with a $0.36 loss at $61.14 bbl, ending at an $0.11 premium to the April contract, and above the 50-day moving average at $59.76 bbl.

The Trump administration took aim at Venezuelan President Nicolas Maduro, who was sworn in to a second six-year term as president last week despite as many as 60 countries calling last year's election a sham, with the United States recognizing opposition leader Juan Guaido as Venezuela's legitimate leader.

Guaido, recently elected to head the National Assembly, declared himself "president in charge" today amid widespread street protests against Maduro on the 61-year anniversary when the people of Venezuela toppled a previous military dictatorship. The aim of the protests is to oust Maduro, with Guaido previously announcing amnesty for members of the military if they support a transitional government. Earlier this week, 23 soldiers were arrested for stealing weapons.

Wednesday's action by the United States gives it a freer hand in supporting a transitional government. Reports indicate the United States is considering slapping sanctions on oil sales from Venezuela, one of the five founding members of the Organization of the Petroleum Exporting Countries, with the Maduro government heavily dependent on the hard currency its oil exports generate.

Crude production in Venezuela declined under the mismanagement of Hugo Chavez, the charismatic socialist who ran Venezuela until his death in 2013, with the loss accelerating under Maduro, who was handpicked by Chavez to succeed him. Venezuelan crude output has plunged from 2.357 million bpd averaged in 2012 to 1.148 million bpd in December.

U.S. Gulf Coast refiners would not welcome those sanctions however, needing the heavy oil produced from Venezuela to mix with shale oil that has made the crude slate much lighter than the refiners need to efficiently run their operations. Years of political stonewalling has limited pipeline capacity from Canada, another heavy oil producer.

U.S. imports of crude oil from Venezuela have declined after peaking in 1997 at 1.773 million bpd, according to data from the EIA, but still averaged 674,000 bpd in 2017. Weekly EIA data shows U.S. imports of Venezuelan crude fluctuated from a 426,000 bpd low to a 706,000 bpd high since the fourth quarter 2018. Venezuela is the third largest importer of crude oil to the United States.

The market ignored the threat of sanctions, unsure whether Wednesday's developments were bullish or bearish, while also recognizing the extraordinary challenge the Venezuelan people have in overthrowing Maduro, who continues to control virtually all levels of the government and military.

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

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