Oil Futures Reverse Higher

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 reversed higher from multi-week lows to end Thursday's session with an advance, as support for West Texas Intermediate held in front of the expiration of September options and the front-end of Brent's forward curve moved into backwardation. Talk of a drawdown in crude stocks at the Cushing terminal in Oklahoma, the delivery location for NYMEX WTI futures, also lent upside price support.

NYMEX September WTI futures settled up 31cts at $47.09 bbl, reversing off a fresh three-week low of $46.46 bbl after testing support at $46.23, the 50% retracement point for the June to July uptrend. The September WTI futures contract expires Tuesday (8/22), with October WTI futures settling up 30cts at $47.24 bbl. WTI's calendar spreads for delivery in 2018 narrowed.

Strength in Brent crude futures also boosted WTI, with Brent futures backwardated through year-end delivery while the calendar spreads for deferred delivery narrowed.

ICE October Brent futures traded at a fresh three-week spot low at the $50.00 psychological support mark before reversing higher, with the spot-month contract settling up 76cts at $51.03 bbl.

Brent's premium over WTI again widened, with the contracts nearest to delivery ending Thursday's session at a $3.94 bbl 1-1/2 year Brent premium high. October Brent futures expire at the Aug. 31 close to trade.

WTI's widening discount to Brent could encourage additional U.S. crude exports, which averaged 877,000 bpd during the week-ended Aug. 11, according to data from the Energy Information Administration.

NYMEX September ULSD futures reversed off a fresh three-week spot low at $1.5488 to settle up 0.76cts at $1.5820 gallon, and NYMEX September RBOB futures traded at a $1.5374 gallon one-month low on the spot continuous chart before rallying into the close, settling up 2.31cts at $1.5869 gallon.

The higher settlements follow midweek price weakness spurred by climbing U.S. oil production and concern over lower gasoline demand in September that pressed the contracts through initial support this week.

Although U.S. commercial crude stocks have been drawn down heavily in the third quarter, down 46.7 million bbl or 9.1% including last week's 8.9 million bbl decline, climbing U.S. oil production that's now at a 9.502 million bpd better than two-year high and the quickly approaching shoulder season had sparked selling. Refiners have run operations at a historically high rate, consistently above year prior and the five-year average since the start of the second quarter. Yet refinery maintenance post Labor Day would reduce crude inputs at U.S. refineries.

Speculation that inventory at Cushing is being drawn down this week lent psychological support, suggesting refiner demand for crude in the Gulf Coast and Midwest remains strong. After reaching a record high inventory level at 69.4 million bbl on April 7, 90.0% of working capacity, crude stocks at Cushing were consistently drawn down until late July. EIA reports Cushing inventory at a 57.0 million bbl one-month high for Aug. 11, 73.9% of working capacity. Tropical storm activity was another factor deterring short positions. "There are three tropical waves that will impact oil shipments and have the potential to disrupt oil and gas production next week," said Chicago-based Phil Flynn, senior market analyst with the PRICE Futures Group.

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

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Brian Milne