Oil Futures End Mixed Monday

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

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange settled the first session of the new week mixed, with crude grades edging higher and oil products lower. The mixed settlement values follow what appears to have been an end to the short-term downtrend, with the contracts holding support at May lows.

RBOB futures, with nearest delivery in its peak demand season, ended at a 5-1/2-week low settlement and at the third lowest settlement on the spot continuous chart of 2017. Building supply, a high rate of gasoline production and drop in demand conspired against the market to pressure the RBOB contract.

NYMEX July RBOB futures settled down 1.37 cents at $1.4880 per gallon, with the previous low settlement on the spot continuous chart established on May 4 at $1.4812 gallon. The most recent Commodity Futures Trading Commission's Commitment of Traders report shows noncommercial traders expanded a net-long position in RBOB futures by 20% during the week-ended June 6 to a six-week high ahead of the release of bearish weekly oil data a day later that sparked a midweek selloff.

NYMEX July ULSD futures settled down 0.58 cent at $1.4254 gallon, holding above last week's $1.4098 gallon one-month low on the spot continuous chart.

NYMEX July West Texas Intermediate settled up 25 cents at $46.08 per barrel (bbl), with a $45.66 intraday low holding above last week's $45.20 one-month spot low. ICE August Brent crude futures ended the session up 14 cents at $48.29 bbl, near a $48.01 intraday low which compares with Friday's $47.40 one-month spot low.

Comments from Saudi Arabia's energy minister that global oil inventories would be drawn down at a quicker pace in the next three to four months lent modest support for oil futures Monday. Khalid Al-Falih added that if adjustments to production are still needed, "we will adjust."

The May 25 decision by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries to rollover nearly 1.8 million barrels per day (bpd) in production cuts set to expire at the end of June through March 2018 was greeted with a selloff from monthly highs, with the market wanting OPEC to do more to cut down a global oil supply glut.

"While Al-Falih believes we will start to see inventory tightening accelerate in the coming weeks, he said that if we don't see inventory drop, then an extension of cuts or a larger cut may be implemented and said that nothing, when it comes to getting the oil market in line, will be off the table. Those comments were echoed by Russian energy minister Alexander Novak who also suggested that current production cuts would soon get the oil market in line," said Chicago-based Phil Flynn, senior market analysts with The PRICE Futures Group.

Flynn added that reports indicating Qatar, a member of OPEC, would continue to cooperate with the cartel's production cut agreement despite a row with Saudi Arabia, Egypt, United Arab Emirates, and Bahrain also underpinned price support.

Saudi Arabia, Egypt, United Arab Emirates, and Bahrain cutoff diplomatic and economic ties with Qatar on June 5 because they said the Gulf state supports terrorism and is working with Iran to undermine political stability in the Middle East. Qatar is a minor oil producer while a major gas producer.

However, the OPEC, non-OPEC coalition faces a tough landscape. Output from OPEC members Nigeria and Libya, both exempt from the production agreement because of internal strife, are climbing. Last week, Royal Dutch Shell lifted a force majeure on its Forcados oil operations in Nigeria, which has been offline for more than a year, according to news reports, that could boost output by 200,000 to 250,000 bpd. In Libya, crude production increased 200,000 bpd to 820,000 bpd with the restart of the Sharara oil field following protests, according to Bloomberg.

The biggest disrupter to OPEC's efforts to rebalance the market is U.S. oil producers, with the Energy Information Administration in its most recent Short-term Energy Outlook released June 6 projecting crude output in the United States would increase to a record high 10.0 million bpd in 2018, topping the previous record high of 9.6 million bpd established in 1970.

Alan Levine, chairman of the Washington, D.C.-based Powerhouse brokerage, said in a note to clients Monday that not only has OPEC misjudged the veracity of U.S. shale oil producers, lower breakeven costs are engineering a renaissance in offshore oil production in the Gulf of Mexico.

"Output in the Gulf was estimated at 1.76 million barrels daily in March. This was a record and about a third higher than in March 2014," noted Levine, adding production costs for deep-water drilling is expected in the $40 bbl range in early 2018 compared with breakeven costs at $75 bbl in 2014.

OPEC will provide its latest outlook with the Tuesday morning release of its Monthly Oil Market Report, with the International Energy Agency to provide its forecast Wednesday morning in its Oil Market Report.

While always a weekly focal point, traders will pay close attention to EIA data for the week ended Friday, June 9, following a very bearish report for the prior week that showed an unexpected build in U.S. commercial crude stocks and a big decline in demand for oil products that sparked a selloff that dropped oil futures to near their lowest valuations of 2017.

A number of analysts have suggested the weekly report was an anomaly, and highlighted the report reflected data for a holiday week. Early indications show the market expects crude inventory to resume its decline with gasoline supply is also seen to have been drawn down last week with distillate stocks to have increased in line with the commodity's seasonal tendency.

The U.S. dollar was modestly weaker in index trading Monday after falling to a seven-month low last week and ahead of Wednesday's decision by the Federal Open Market Committee on interest rates, with the central bank expected to hike the key federal funds rate by 0.25% from 1.0% amid an improving economy including employment, with the national unemployment rate falling to a 16-year low in May. The U.S. dollar has an inverse relationship with domestic crude prices since oil trades globally in the U.S. currency.

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

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Brian Milne