Oil Futures Up on Inventory Draws

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange settled Tuesday's session higher ahead of weekly supply reports expected to show drawdowns in U.S. commercial crude and gasoline inventory, with RBOB futures reversing from a five-week low.

The advance also comes as technical support levels hold, with the short-term trend for West Texas Intermediate, Brent and ULSD futures seen to have turned higher.

NYMEX July WTI futures settled up 38 cents at $46.46 per barrel (bbl), with ICE August Brent ending 43 cents higher at $48.72 bbl. NYMEX July ULSD futures ended the session 2.23 cents higher at $1.4477 gallon, while July RBOB futures reversed off a $1.4746 five-week low on the spot continuous chart to settle 1.15 cents higher at $1.4995 gallon.

The advance precedes U.S. oil supply data for the week-ended June 9 set for release at 4:30 p.m. EDT by the American Petroleum Institute and 10:30 a.m. ET Wednesday by the Energy Information Administration.

The market expects U.S. commercial crude oil supply to have been drawn down 2.5 million bbl last week, resuming a series of drawdowns for crude oil after EIA reported a 3.3 million bbl build in the previous week that lifted supply to 513.2 million bbl on June 2.

It was the first build in U.S. crude stocks in nine weeks, and undermined a bullish narrative that crude supply would be drawn down quickly over the coming months amid record high refining activity in the United States alongside nearly 1.8 million bpd in production cuts from the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries. On June 2, U.S. commercial crude oil supply was 11.4 million bbl or 2.3% higher than year prior and 108.0 million bbl more than the five-year average.

Gasoline supply in the United States is estimated to have declined 1.0 million bbl during the week-ended June 9 after climbing 3.3 million bbl week prior to 240.3 million bbl, with the build following four straight weeks with a drawdown. Distillate supply is expected to have increased by roughly 750,000 bbl for the week under review, with distillate stocks typically increasing during the summer months.

This morning, OPEC issued its Monthly Oil Market Report with minimal adjustments from month prior. OPEC did revise down projected non-OPEC oil supply by 110,000 bpd to 58.14 million bpd. Still, non-OPEC supply is expected to grow 840,000 bpd year-on-year in 2017, with 800,000 bpd of that growth rate from the United States.

Higher U.S. output has frustrated OPEC's efforts to meaningfully reduce global oil supply, which has persisted above historical averages for the third year in 2017. OPEC wants global oil inventory to drop to its five-year average.

In their monthly report, commercial oil supply held by the 35-country member Organization for Economic Cooperation and Development was shown to have been drawn down a modest 8.0 million bbl in April to 3.005 billion bbl, which is 251 million bbl above the five-year average.

Output growth from Libya and Nigeria has also clouded the outlook in reducing the inventory surplus, with the two OPEC members exempt from the production agreement because of internal issues. Citing secondary sources, the MOMR said OPEC crude oil production in May increased 336,000 bpd to 32.14 million bpd, with the higher output rate due to production gains in Libya and Nigeria, up 178,200 bpd and 174,200 bpd, respectively.

"The underlying source of the supply imbalance that emerged in 2014 was the growth of US tight oil," writes BP Group chief economist Spencer Dale in BP's annual Statistical Review of World Energy released today.

Dale, reiterating comments made in March by Saudi Arabian energy minister Khalid Al-Falih, said the emergence of tight oil production in the United States is "not a short-term aberration; it was the emergence of a new source of intra-marginal supply."

Dale cites Al-Falih in saying Saudi Arabia does not support an intervention by OPEC to address long-term structural imbalances because such action "is largely ineffective." Instead, OPEC would take action to counter "short-term aberrations."

As such, "the focus now is on increasing the pace at which the huge overhang of oil stocks is drawn down to more normal levels," said Dale. "This is exactly the type of temporary adjustment in which OPEC intervention can be effective -- reducing supply until stocks have adjusted."

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

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