Oil Futures Settle Lower Tuesday

CRANBURY, N.J. (DTN) -- The front month contracts for New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled lower on profit taking Tuesday following Monday's upside breakout session for West Texas Intermediate and Brent futures. The crude contracts registering fresh multi-month highs at $57.69 bbl and $64.65 bbl, respectively, before settling with minor declines. NYMEX RBOB and ULSD futures held below better than two-month and 28-month highs, respectively, registered Monday, consolidating within prior day's trade range.

The lower settlements come ahead of inventory data for the week-ended Nov. 3 due out this afternoon by the American Petroleum Institute and at 10:30 AM ET Wednesday by the Energy Information Administration, with the market anticipating crude, gasoline and distillate inventories were drawn down for a second consecutive week. EIA last reported commercial crude inventory at a 454.9 million bbl 22-month low, distillate stocks at a 128.9 million bbl nearly 28-month low, and gasoline storage levels at a 212.8 million bbl better-than 26-month low.

Tuesday's consolidation session comes amid overbought market conditions, and after Monday's price spike in the wake of a weekend crackdown in Saudi Arabia against possible opponents to Crown Prince Mohammed bin Salman and his aggressive pursuit of social and economic reforms for the once staid kingdom. Dozens of princes, ministers and businessmen were arrested over the weekend following a two-year corruption probe, with the arrests seen as a first phase in a plan to consolidate the Crown Prince's power. The ambiguous 32-year old is heir apparent to the throne now held by his 81-year old father, King Salman.

The Saudi purge also has regional implications, said analysts, as Saudi Arabia looks to thwart Iran's encroachment in the Middle East following the collapse of the Islamic State within the region. The two countries have been long-time foes and adhere to different versions of Islam. Saudi Arabia is waging war against Houthis rebels in Yemen that are supported by Iran. There is speculation that the "cold war" between the two regional powers could heat up, potentially threatening oil transit through the Strait of Hormuz and the Bab el-Mandeb Strait, and possible oil production in Saudi Arabia and Iran.

Both Saudi Arabia and Iran on members of the Organization of the Petroleum Exporting Countries.

The Saudi purge pushed the increasingly likely debt default by Venezuela off the front page. Venezuela, a member of OPEC, has the highest rate of inflation in the world, according to the International Monetary Fund, and hasn't been able to supply basic food staples to its population for months. The United States imposed sanctions on Venezuela, including the country's president, Nicolas Maduro, over the summer following undemocratic elections.

Maduro called for a restructuring of its debt over the weekend, scheduling a meeting with creditors on Nov. 13. There's speculation that the Venezuelan president is looking to hold back debt payments and use the revenue to bring in imports of basic needs to drum up local support ahead of presidential elections next year while blaming U.S. sanctions as a reason for the default.

Venezuelan oil production has been on a steady decline for months amid mismanagement and a lack of funds for repairs and operations. There have been several reports of buyers of their crude refusing shipment because of quality issues.

As these dramatic events heighten the geopolitical risk premium in oil prices, oil fundamentals are bullish, with faster-than-expected global demand growth and production restraint by OPEC and 10 non-OPEC oil producing countries rebalancing the world oil market following three years of oversupply.

OPEC will meet in Vienna on Nov. 30 to discuss market conditions and the effect to date of their production agreement with non-OPEC oil producers that calls for 1.8 million bpd in output cuts. The supply pact took effect on Jan. 1 and runs through the end of March 2018, and is widely expected to be extended for all of 2018. While there's widespread support for the extension, non-OPEC oil producer Russia has said a decision should wait until March.

At settlement, NYMEX December WTI futures were down 13cts at $57.22 bbl, with ICE January Brent 56cts lower at $63.71 bbl. NYMEX November ULSD futures settled down 2.11cts at $1.9211 gallon, and December RBOB futures declined 0.93cts with a $1.8207 gallon settlement.

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

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