Futures Surge Ahead of Expiration

CRANBURY, N.J. (DTN) -- Oil products futures traded on the New York Mercantile Exchange rallied Monday, with the August RBOB and ULSD contracts posting new highs on their spot continuous charts ahead of their expiration this afternoon, while West Texas Intermediate and Brent crude on the IntercontinentalExchange registered more modest gains.

WTI futures did settle above $50 bbl on the spot continuous chart for the first time in two months, shaking off early profit-taking losses amid an overbought market, with the advance topping the psychologically significant price point as the U.S. dollar slumped to a 15-month low.

Oil trades globally in the U.S. denomination, so a weaker greenback boosts U.S. crude to compensate for the decline in the currency.

NYMEX September WTI futures settled at $50.17 bbl, up 46cts, and traded at a two-month spot high of $50.41 bbl.

"The upward shift in nearby prices is dramatic, with little carry remaining. It is likely that WTI prices will flip into backwardation, with near prices higher than more distant months. Brent crude oil has already backwardated," Washington, D.C.-based Alan Levine, chairman of the brokerage outfit Powerhouse, noted in a note to clients.

ICE September Brent expired up 13cts at $52.65 bbl, and traded at a better than two-month high on the spot continuous chart of $52.92 bbl. October Brent settled up 50cts at $52.72 bbl.

NYMEX August RBOB futures expired up 2.97cts at $1.7058 gallon, and traded at a $1.7101 gallon 3-1/2 month high on the spot continuous chart before rolling off the board. September RBOB futures settled up 3.08cts at $1.6766 gallon.

NYMEX August ULSD futures expired up 1.22cts at $1.6519 gallon, and traded at a $1.6663 gallon better than five-month spot high before expiring, while the September contract settled up 2.65cts at $1.6674 gallon.

Monday's rally maintains the upside momentum for the oil futures complex seen in late July after plunging to multi-month lows in late June amid signs the global oil market is rebalancing following three years with too much supply. The advance comes as U.S. crude and product inventory is being drawn down while demand has been strong.

The advance has also found support from the Organization of the Petroleum Exporting Countries as the producer group targets countries within their organization that are not fully complying with their quotas under a 15-month production agreement.

OPEC compliance with 1.2 million bpd in production cuts wavered in June and early reports suggested the trend continued into July. The situation prompted Saudi Arabia and other OPEC members to call on fellow members to better adhere to their quotas, why the Saudis said last week they would hold their crude exports at 6.6 million bpd in August, down 1.0 million bpd from August 2016.

Ten oil producing countries that are not part of OPEC, which includes Russia, joined OPEC in their agreement by pledging combined reduction in output of 558,000 bpd.

OPEC announced in a news release over the weekend that the Joint OPEC-Non-OPEC Technical Committee would convene a meeting Aug. 7-8 in Abu Dhabi, United Arab Emirates, with some OPEC and non-OPEC producers "to identify ways and means of raising levels of conformity."

"This is a technical meeting being held to better understand the difficulties and obstacles faced by some OPEC and non-OPEC participating countries and to assess how conformity levels can be improved with the goal of achieving a faster rebalanced global oil market, for the benefit of producers and consumers alike," said OPEC.

"OPEC wants to crackdown on the cheaters and continue to drain global supply that has already fallen at breakneck speed since the end of March," said Chicago-based Phil Flynn, senior market analyst with The PRICE Futures Group.

Monday's rally also follows what have been called sham elections in Venezuela on Sunday, where the government of Nicolas Maduro carried out a vote for a new Congress that will be tasked to rewrite the country's constitution. The latest act by Maduro is seen pushing Venezuela into a dictatorship.

OPEC member Venezuela has squandered its resources, with the once rich South American nation impoverished and incapable of supplying even the most basic of needs for its population. Street protests have taken place for months, and more than 100 have been killed.

The United States recently sanctioned 13 Venezuelans, and this afternoon sanctioned Maduro for holding the elections, freezing his U.S. assets.

Despite a decline in Venezuela's oil production and inefficiencies in its refining sector due to lack of investment and shoddy management, the situation unfolding in the South American country are bullish for oil prices.

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