Oil Rallies Early Wednesday

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange are rallying early Wednesday on a combination of factors, including indications a global oil supply-demand imbalance is narrowing.

A host of supply disruptions globally in April and May, declining U.S. crude production, and strong demand from China, India and the United States are seen to have accelerated the move towards equilibrium between production and demand. The Energy Information Administration on Tuesday in their monthly Short-term Energy Outlook said inventory gains would average 1.0 million bpd this year and decrease to 300,000 bpd in 2017.

Bullish technical factors, a weaker U.S. dollar, and a drawdown in U.S. commercial crude oil inventory last week reported late Tuesday by the American Petroleum Institute added to the bullishness.

At 9:00 AM ET, NYMEX July West Texas Intermediate futures were up 68cts at $51.04 bbl and near a $51.15 nearly 11-month high on the spot continuation chart. ICE August Brent crude futures were up 83cts at $52.27 bbl and near a $52.34 eight-month spot high.

NYMEX July ULSD futures had gained 2.27cts to $1.5642 gallon at 9:00 AM ET, near a fresh seven-month high on the spot continuation chart of $1.5647 gallon. NYMEX July RBOB futures were up 1.59cts at $1.6030 gallon amid inside trade, with the contract pulled higher by the complex as a high inventory level nationally limits the upside.

The U.S. dollar dropped to a one-month low, as the May employment report "shocker" continues to reverberate in currency trade, raising questions about the health of the U.S. economy, and pushing back an increase in the key federal funds rate by the Federal Reserve.

The rally follows API's weekly report on supply changes that showed a larger-than-expected 3.56 million bbl drawdown in U.S. commercial crude stocks during the week ended June 3 that was more than a consensus view for a 3.0 million bbl decline. The API report was bearish for products, especially gasoline, with the trade group reporting a 760,000 bbl build in gasoline inventory compared with market estimates for a 1.0 million bbl draw and a 270,000 bbl increase in distillate fuel supply versus expectation for a 500,000 bbl decline.

The EIA releases their weekly supply report at 10:30 AM ET.

The market has been focused on supply disruptions during the second quarter, namely from Nigeria, a member of the Organization of the Petroleum Exporting Countries, with the North African nation's oil and gas infrastructure targeted by militant attacks.

In their monthly outlook Tuesday, EIA said disruptions shut-in nearly 800,000 bpd of crude oil production in May that was up from 500,000 bpd in April, and compares with a 300,000 bpd average for 2015. EIA said Nigeria's crude oil production dropped to 1.4 million bpd in May, its lowest monthly average since the late 1980s.

"Disruptions in Nigeria increased as militants escalated attacks on oil and natural gas infrastructure in the Niger Delta. EIA expects Nigeria's disruptions to remain relatively high through 2017 compared with recent years," said EIA.

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


Brian Milne