Oil Lower Ahead of EIA Supply Data

NEW YORK (DTN) -- New York Mercantile Exchange crude futures moved lower Wednesday morning ahead of the Energy Information Administration’s weekly data due at 9:30 a.m. CDT that’s expected to show a draw for domestic crude oil stocks and builds for refined products.

The oil futures complex also came under selling pressure from a strengthening U.S. dollar, with the greenback surging after U.S. Federal Reserve Chair Janet Yellen released a copy of her prepared testimony showing she expects to tell Congress Wednesday morning that the central bank would likely hike the federal funds rates this year, adding the prospects are good for improvement in the labor market and the broader economy.

Yellen’s assessment follows U.S. inflation data issued this morning showing the producer price index rose 0.4% in June month-over-month, led by a 2.4% surge in energy prices.

Oil trading has been dominated by the Iran nuclear agreement announced Tuesday that pushed Greece and other economic issues to the backburner. The debate has moved to Capitol Hill where the deal got a hostile reception from Congressional Republicans and some members of the public, while Democrats are withholding judgment until further review of the deal. President Barack Obama said he would veto a Congressional resolution disapproving the deal.

At 8 a.m. CDT, the NYMEX August WTI crude contract was down 44 cents at $52.60 bbl while ICE August Brent crude futures were 61 cents down at $57.90 bbl ahead of the August contract’s expiration Thursday. Brent’s premium over WTI narrowed 19 cents to $5.28 bbl.

In products trade, the NYMEX August ULSD contract was down 2.66 cents at $1.6987 gallon while the NYMEX August RBOB contract eased 1.68 cents to $1.9139 gallon.

On Wall Street, equities were mixed while the dollar moved a tad higher, with a stronger dollar seen as bearish for oil futures.

The oil market has so far glossed-over the American Petroleum Institute's report issued late Tuesday that showed a 7.3 million bbl plunge in weekly U.S. crude oil supplies, as well as data showing China's economy grew at a better-than-expected 7.0% in the second quarter.

The market was distrustful of China's data, prompting strong defense from the country's National Bureau of Statistics that said the figure was not inflated but correctly reflected the economy.

The 7.0% gross domestic product for China lowered expectation for further stimulus measure by China, which is why both the Shanghai composite stock market and oil futures fell, said analyst Phil Flynn at Price Futures Group in Chicago.

Oil traders continued to mull the Iran nuclear deal's likely impact on global oil supply in the short-to-medium term while also concerned about an anticipated week-over-week build in finished U.S. oil product inventories.

While the nuclear deal between Iran and six world powers was initially bearish for crude oil futures as it could boost Iranian crude exports and add to the global oil supply glut, the oil complex recovered late Tuesday when traders realized the extra oil supply may not flow to the market this year adding the oil futures market was also oversold.

Barclays Bank said in a report that Iran still has a steep hill to climb to comply with the deal, which means delays for additional Iranian crude oil exports, although pressuring the back-end of the oil futures forward curve.

“[We] assume a slow ramp-up in [Iran's] oil production. It's likely to increase 200,000 bpd by Q4 2015 from Q2 levels, and a further 400,000 bpd by Q4 2016,” said the Barclays report. “As Iran clears some of its estimated 40 million bbl in floating storage, exports will exceed these newly produced volumes by as much as 200,000 bpd.”

Other analysts estimate a 300,000 bpd to 500,000 bpd in new crude supply on the market within six to 12 months after the start of the implementation of the deal, which is expected to be in October. Wood Mackenzie, a risk management firm, said it expects only 600,000 bpd of new oil output by the end of 2017.

According to the U.S. Energy Information Administration, Iran produced 2.8 million bpd of crude oil last year, down from 3.7 million bpd in 2011 when sanctions were imposed on Tehran. Iran exported 1.4 million bpd, down from 2.6 million bpd before the sanctions.

Domestically, the API late Tuesday reported a 7.3 million bbl decline in U.S. crude stocks for the week-ended July 10 versus an expected 3.2 million bpd draw. However, crude stocks at the Cushing, Oklahoma, supply hub that also serves as the delivery point for NYMEX WTI increased by 400,000 bbl, API said, nearly matching an expected 500,000 bbl rise.

George Orwel can be reached at george.orwel@telventdtn.com