CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery traded on the New York Mercantile Exchange and the front month Brent crude contract on the Intercontinental Exchange edged lower early Tuesday on light profit taking following Monday's explosive rally that saw West Texas Intermediate and Brent crude break out of long-term ranges.
Oil futures have been on an upswing since late in the third quarter on improving fundamentals, including better-than-expected demand growth in the United States and globally, and declining inventory. Commercial oil inventory held by the 35-country members that make up the Organization for Economic Cooperation and Development dropped to 160 million bbl above the five-year average at the end of the third quarter after starting 2017 340 million bbl above the historical average.
Production cuts of 1.8 million bpd by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries that took effect Jan. 1 are being credited with the global drawdown in oil inventory. OPEC meets Nov. 30, and is widely expected to extend the production agreement from the end of March 2018 through all of 2018.
The weekend crackdown in Saudi Arabia of rivals and opponents to reform championed by Crown Prince Mohammed bin Salman, heir apparent to King Salman, rallied oil futures on concern over stability in the kingdom and region. The Crown Prince, the 32-year old son of King Salman, is largely in control of the Saudi government, and is pushing for extensive reform, including ending the country's dependency on oil. The Crown Prince has put forward Vision 2030, a plan to diversify the economy that includes an IPO for Saudi Aramco.
The weekend purge is also seen as a first phase as King Salman consolidates power ahead of his expected abdication of the throne either this year or in early 2018, and as Saudi Arabia and Iran position for greater influence in the Middle East with the demise of Islamic State in the region.
"It also raises concerns about a more aggressive Saudi Foreign policy that could lead to an expansion of the war in Yemen as well as a direct confrontation with Iran. The Saudi's say a [weekend] missile strike from Yemen on the capital of Riyadh was from Iran and that they would soon respond in an appropriate manner," said Chicago-based Phil Flynn, senior market analyst with The PRICE Futures Group.
Flynn said there is concern that an escalation of the Yemen war could directly impact oil routes in the region, including through the Strait of Hormuz and the Bab el-Mandeb Strait, and potentially affect oil production in Saudi Arabia and Iran.
WTI and Brent futures registered fresh better-than 28-month highs on their respective spot continuous charts at $57.69 and $64.65 bbl, respectively, overnight before slipping lower early Tuesday. The market's well overbought while technical charts point to more upside.
At 9:00 AM ET, NYMEX December WTI futures were down a fraction near $57.25 bbl, with resistance at $58.32 bbl. ICE January Brent futures were also slightly lower near $64.10 bbl, with retracement resistance found at $65.80 bbl.
NYMEX December ULSD futures were flat near $1.9415 gallon, holding below Monday's $1.9468 gallon better-than 28-month high on the spot continuous chart with a $1.9460 gallon trade overnight.
NYMEX December RBOB futures were down about 0.65cts near $1.8235 gallon, holding below Monday's $1.8390 gallon better-than two-month spot high with a $1.8350 gallon high traded overnight.
The Energy Information Administration releases its Short-term Energy Outlook near the noon hour New York time, which includes a supply and demand outlook for 2018.
Brian L. Milne can be reached at firstname.lastname@example.org
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