Oil Futures Sink to 3-Week Lows

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange settled at three-week lows in an outside down session, as a massive weekly drawdown in commercial crude oil stocks in the United Sates was outmuscled by building oil product inventory and a decline in demand.

Although demand for oil products remains strong, slightly outpacing year ago through early August, the end to the summer's peak driving season looms in less than three weeks. Demand for gasoline, which consistently declines in September from August, accounts for roughly 40% to 45% of total oil demand in the United States.

Midmorning Wednesday, the Energy Information Administration reported a larger-than-expected 8.9 million barrel (bbl) drawdown from commercial crude inventory in the United States that lowered stocks to a 466.5 million bbl 19-month low. Since peaking at 535.5 million bbl at the end of the first quarter, commercial crude oil supply has been drawn down 69.0 million bbl, or 12.9%.

The steep drawdown is realized by record refining activity, with crude inputs consistently topping 17.0 million barrels per day (bpd) in the third quarter. The high rate of processing activity has, however, pushed extra barrels downstream even with strong demand prompting modest weekly supply builds for gasoline, up 22,000 bbl to 231.1 million bbl last week, and for distillates, with inventory up 700,000 bbl to 148.4 million bbl.

As the gasoline season ends and refiners shut units for maintenance and extended turnarounds, the concern is U.S. crude stocks would again build.

EIA reported U.S. crude oil production increased 79,000 bpd to a 9.502 million bpd better-than two year high during the week-ended Aug. 11, with output up 905,000 bpd against the comparable year-ago period. On Monday, EIA forecasted U.S. shale oil production would again increase in September.

NYMEX September West Texas Intermediate futures broke below retracement support at $47.22 bbl with a decline to $46.67, settling down 77 cents at a $46.78 bbl three-week low. September WTI futures held above support at $46.23 bbl, the halfway point for the rally from the June low to the July high.

A weaker U.S. dollar failed to boost WTI futures, with the two commodities having an inverse relationship since crude oil trades internationally in the U.S. currency.

The dollar reversed from a fresh three-week high, with the weakness accelerating following the 2 p.m. EDT release of minutes from the Federal Open Market Committee's July 25-26 meeting.

Central bank officials last month highlighted limited inflation, which undercuts pricing power, and continues to hold below the Federal Reserve's 2% target. The Consumer Price Index increased 1.5% in June from June 2016.

Slow inflation growth prompted FOMC last month to maintain the federal funds rate at 1% to 1.25%, with the overnight bank lending rate last raised in June. Central Bank officials also choose to remain accommodative at their July meeting, the minutes show.

The central bank said they would continue to reinvest principal payments, with their portfolio at $4.5 trillion following years of asset purchases made to stabilize the economy following the Great Recession. While the market consensus wasn't expecting a rate hike in the federal funds rate in July, there were expectations that FOMC would begin a return to normalized monetary policy beginning in September.

NYMEX September ULSD futures settled down 2.52 cents at a $1.5744 gallon three-week low on the spot continuous chart, while holding above support at $1.5533 gallon with a $1.5698 intraday low.

NYMEX September RBOB futures settled down 1.57 cents at a $1.5638 gallon three-week low on the spot continuous chart, holding support at $1.5528 gallon with a $1.5590 intraday low.

October Brent crude futures on the IntercontinentalExchange settled down 53 cents at $50.27 bbl, continuing to hold over psychological support at $50 bbl. Brent's premium to nearest delivered WTI futures widened to a five-month high at $3.49 bbl.

The widening differential between Brent and WTI futures could spur more U.S. crude exports. EIA midmorning reported U.S. crude exports averaged 877,000 bpd last week.

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

(BE)

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