Oil Mixed in Wednesday Trade

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 were shallowly mixed with a downside bias early Wednesday, trading overnight near the low end of this week's trade range, with the RBOB contract testing Tuesday's $1.4746 gallon five-week low with a $1.4776 trade.

The market weakness follows a bearish short-term outlook for oil markets released this morning by the International Energy Agency and ahead of weekly oil supply data for the United States from the Energy Information Administration due out at 10:30 AM ET.

In its Oil Market Report, IEA said global oil production ramped up in May, with output higher for both the Organization of the Petroleum Exporting Countries and non-OPEC producers, and inventory held by developed economies increased in April.

Up 290,000 bpd to 32.08 million bpd in May, OPEC production was at its highest point of 2017 despite good compliance by cartel members with their agreement to cut production 1.2 million bpd said IEA, putting compliance by OPEC during the first five months of 2017 at 96%. The monthly increase in OPEC supply was driven by Nigeria and Libya, with both countries exempt from supply cuts due to internal struggles.

OPEC has stated the goal of the production cuts is to lower global oil supply to its five-year average. However, inventory held by the 35 countries that make up the Organization for Economic Cooperation and Development increased in April, and that the surplus against the five-year average at 292 million bbl is higher than when OPEC first agreed to cut production.

"Indeed, based on our current outlook for 2017 and 2018, incorporating the scenario that OPEC countries continue to comply with their output agreement, stocks might not fall to the desired level until close to the expiry of the agreement in March 2018," said IEA.

The Paris-based agency maintained its outlook for global oil demand in 2017 to grow 1.3 million bpd year-on-year, calling a slowdown in the first quarter growth rate of 900,000 bpd transitory. However, slowing demand did prompt IEA to narrow the expected supply deficit for the second quarter from 700,000 bpd to 500,000 bpd.

In its first forecast for 2018, IEA projects global oil demand would grow 1.4 million bpd to 99.3 million bpd. However, the Paris-based analysts projects non-OPEC supply growth to increase 1.5 million bpd to 59.8 million bpd following year-on-year growth of 700,000 bpd this year, with new supply next year seen outpacing demand by 100,000 bpd.

"[O]ur first outlook for 2018 makes sobering reading for those producers looking to restrain supply," said IEA.

After a bearish slate of weekly U.S. oil supply data released last week by the EIA, some analysts think this week's report will show that the data was an anomaly, exaggerated by a holiday-shortened week.

Late Tuesday, the American Petroleum Institute reported an unexpected 2.75 million bbl build in U.S. commercial crude supply for last week that ran contrary to expectations for a 2.5 million bbl draw. Crude supply at Cushing, Oklahoma, the delivery location for NYMEX West Texas Intermediate crude futures was drawn a less-than-expected 830,000 bbl, with estimates calling for a 1.5 million drawn.

"The American Petroleum Institute figures for last week included an unexpected 2.8 mmbls build in US commercial crude oil inventories as a bearish surprise, although we note the resulting total of 511.4 mmbls is actually 1.8 mmbls lower than last week's DOE total, suggesting that the DOE figures may not confirm the increase," said Tim Evans, Energy Futures Specialist with Citi Futures and OTC Clearing.

Gasoline data was bearish, with API reporting gasoline inventory increased 1.79 million bbl last week when estimates were for a 1.0 million bbl decline. API said distillates stockpiles dropped 1.45 million bbl during the week-ended June 9 versus an expected build of 750,000 bbl.

At 9:00 AM ET, NYMEX July West Texas Intermediate futures were down 27cts at $46.19 bbl, with ICE August Brent 19cts lower at $48.53 bbl. NYMEX July ULSD futures firmed at $1.4479 gallon, with July RBOB futures down 1.03cts at $1.4892 gallon.

The U.S. dollar took a nosedive this morning to a seven-month low following the 8:30 AM ET release of U.S. data on retail sales and inflation, with the Commerce Department reporting a 0.3% drop in retail sales in May versus expectations for a 0.1% increase, and following a 0.4% jump in April. The Bureau of Labor Statistics reported the Consumer Price Index eased 0.1% in May versus expectations for no change, while up 1.9% from year prior. Lower energy prices, namely gasoline, pressured the inflation indicator last month.

The weak data sets come as the Federal Open Market Committee meets, with the Fed expected to hike the federal funds rate currently at 1.0% by 0.25%.

The weakness in U.S. data contrasted with supportive data for the world's second largest economy after the United States, with China reporting industrial output at 6.5% for a second straight month in May compared with expectations that production would slip 0.1%. Retail sales in China also surprised to the upside, increasing a more-than-expected 10.7% in May.

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

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Brian Milne