Oil Higher on Expected Supply Draw

NEW YORK (DTN) -- New York Mercantile Exchange oil futures surged Monday morning, bouncing back from a rout on Monday on economic optimism in the United States and Europe and the prospect of further decline for U.S. oil production and lower weekly domestic crude inventories.

"The market is rebounding with the stock market and because inventories are falling," said analyst Phil Flynn at Price Futures. "Genscape's numbers are showing a dip of more than 1.0 million barrel in Cushing crude stocks, which is a sign that U.S. production is falling faster than thought."

He added, "I think very soon we'll see U.S. production down by 1.0 million bpd from the peak a few months ago, so instead of demand destruction we are seeing supply destruction."

Traders are mulling whether the U.S. economy is strong enough to sustain a slowdown in China, with Case-Shiller home price index for 20 major cities up 4.96% year-over-year in July, while eurozone's economic confidence rose to a four-year high this month.

At last look, NYMEX November WTI crude futures were up 42 cents at $44.85 bbl while ICE November Brent crude oil futures gained 58 cents to $47.92 bbl.

NYMEX October ULSD futures climbed 1.41 cents to $1.4913 gallon while November prices increased 1.39 cents to $1.5156 gallon. NYMEX October RBOB futures added 0.24 cents to $1.3512 gallon while November prices added 0.32 cents to $1.3358 gallon. NYMEX October products futures contracts will expire Tuesday.

On Wall Street, U.S. stock indices moved about 0.5% higher on risk-on trade, boosted by a recovery in the oil market, with the dollar index up 0.2%. The stock market is a gauge for investor sentiment, so today's strength suggests a bullish outlook.

Markets tumbled Monday on concerns over a drop in China's industrial profits, but investors shrugged off those worries in premarket trade and instead are looking ahead to U.S. reports on oil inventories and consumer confidence due later Tuesday.

The market found support Tuesday morning after the European Commission reported economic sentiment index rose to 105.6 in September, the highest since June 2011, from a revised 104.1 for August on the back of improved industrial and services sectors. The gains came despite concerns about China woes and slow global growth.

The main focus is oil market fundamentals. There's mounting evidence U.S. production is falling, which would tighten supply and demand balance in the medium if the U.S. economy continues to strengthen. Deutsche Bank estimated that non-OPEC production growth could reverse from expansion to contraction in 2016 for the first time since 2008.

Short term, analyst Phil Flynn at Price Futures Group estimates a 2.5 million bbl draw in crude stocks for the week-ended Sept. 25, with distillate stocks seen down 2.0 million bbl while gasoline stocks are seen to have increased by 1.0 million bbl.

Research firm Genscape on Monday released data estimating a drawdown of 1.0 million bbl for the week-ended Sept. 25 from the Cushing, Oklahoma, supply hub that serves as the NYMEX delivery point for West Texas Intermediate.

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