Oil Futures Rally Tuesday

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude futures on the Intercontinental Exchange rallied to end higher Tuesday after Monday's down day, advancing following Monday afternoon's late announcement by the Trump administration that it was slapping sanctions on Venezuela's oil company, PDVSA, and subsidiary CITGO.

U.S. officials have indicated the sanctions will have a minimal impact on U.S. Gulf Coast refinery operations, with refiners there big buyers of Venezuela's heavy crude oil that is blended with light oil, which is widely available in the United States amid the shale oil revolution. U.S. refiners can still procure Venezuelan crude as long as the revenue does not go to the government of Nicolas Maduro, with the purpose of the sanctions to pressure Maduro to step down.

Maduro was sworn into a second six-year term as president earlier this month in an election last year rife with fraud. Juan Guido, head of Venezuela's National Assembly, cited the country's constitution in taking over as interim president last week. The United States and roughly 20 other countries, including most of the countries in South America, quickly recognized Guido as Venezuela's legitimate leader.

Although the United States will allow U.S. companies to buy Venezuelan oil, it might be harder to lift the supply from the country, a founding member of the Organization of the Petroleum Exporting Countries. Reports indicate PDVSA will require cargoes from U.S. companies to be prepaid before loaded and allowed to leave port.

The United States has also banned sales of diluent, such as naphtha, from U.S. suppliers to Venezuela, which is used by PDVSA to make its heavy crude marketable and improve yield.

These actions will create short-term supply dislocations as Gulf Coast refiners look to shore up supply of heavy and medium crude from Canada, Mexico and Iraq. More Venezuela crude is seen sent to China, although those sales will likely go towards debt Caracas owes Beijing. China is reported to have lent Venezuela as much as $50 billion.

Venezuela is the third largest crude exporter to the United States, with U.S. crude imports averaging 547,000 barrels per day (bpd) in December, according to the Energy Information Administration.

The concern over a tightening heavy and medium crude market pushed aside worry over global oil demand, which sent oil futures to multi-week lows on Monday amid mounting signs the U.S.-China trade dispute is causing global economic harm. Senior trade officials with China are in Washington for meetings with their U.S. counterparts on Wednesday and Thursday. Failure to reach some type of accord by the end of a 90-day truce on March 1 is seen prompting an escalation in the trade dispute that would dampen global economic growth and oil demand.

Oil futures were higher ahead of the late afternoon release of weekly supply data from the American Petroleum Institute and Wednesday morning's EIA report. The market expects U.S. commercial crude stocks increased 3.1 million barrels (bbl) during the week ended Jan. 25, with the build coinciding with the move into refinery maintenance season. The refinery run rate is seen down 0.6% on the week from a 92.9% eight-week low.

Gasoline stocks are seen to have increased by about 2.0 million bbl for the week profiled after reported by the EIA at a 259.6 million bbl record high. Distillate fuel supply is expected to have declined by about 2.0 million bbl for the week reviewed.

At settlement, NYMEX March West Texas Intermediate futures were up $1.32 at $53.31 per bbl. ICE March Brent futures gained $1.39 to $61.32 bbl, settling at a $0.12 premium to April delivery ahead of its contract expiration Thursday afternoon.

NYMEX February ULSD futures rallied 5.98 cents to a $1.8975 per gallon settlement, with the March contract settling at a 0.30-cent discount in the seasonally backwardated market. NYMEX February RBOB futures settled 1.78 cents higher at $1.3509 gallon following inside trade, with the March contract ending at a 2.13-cent premium to the February contract.

NYMEX February ULSD and RBOB futures expire at the end of trade Thursday.

Oil futures traders will also keep an eye out for comments from Federal Reserve Chairman Jerome Powell Wednesday afternoon following the Federal Open Market Committee's two-day meeting. The Fed is not expected to hike interest rates, with the federal funds rate now in a 2.25% by 2.5% band. The U.S. dollar edged up from a two-week low Tuesday afternoon.

The Bureau of Economic Analysis said it will delay the release of U.S. gross domestic product data for the fourth quarter and 2018 previously scheduled for release Wednesday morning because of the partial government shutdown, with 25% of the federal government closed for a record 35 days. The market expects fourth quarter U.S. GDP to have slowed to a 2.6% annualized growth rate from the third quarter's 3.4% expansion rate.

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

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