Oil Futures Hit Highs Early Thursday

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange hit new spot month contract highs in early trade Thursday, driven by strong motor gasoline demand and a sizeable drawdown in distillate inventories this year. Analysts said renewed concerns over Iran sanctions and its potential effect on oil exports are also propping up crude values.

Traders hinted on Thursday that recent data showing another weekly draw in distillates and a larger-than-expected draw in gasoline inventories could be driving crude prices in the absence of limited headlines from the Middle East even though U.S. production and exports continue to grow.

Near 9:00 AM ET, NYMEX June WTI futures were up 52 cents to $72.01 bbl, near a $72.30 overnight trade that is the highest price point since November 2014. ICE July Brent spiked above the $80 bbl mark for the first time since November 2014, posting a trade at $80.18 bbl, while NYMEX June RBOB futures posted a fresh spot contract high at $2.2664, before slipping a bit to $2.2571, fractionally higher. The June ULSD contract spiked to $2.2934, also new spot contract high, though later traded at $2.2873, up 1.81 cents.

Recent data and analysis from the International Energy Agency indicates world oil demand would remain above 96 million bpd, the third consecutive three-month quarter where demand achieved that level. Continued high demand levels come even as the energy watchdog's monthly Oil Market Report said rising oil prices prompted the agency to trim its annual growth projection for this year to 1.4 million bpd from earlier estimates at 1.5 million bpd.

IEA said the decision by the United States to withdraw from the Joint Comprehensive Plan of Action regulating Iran's nuclear activities has switched the focus of oil market analysis from the fundamentals to geopolitics.

"In these early days, there is understandable uncertainty about its potential impact on Iran's oil exports, which are currently about 2.4 mbd," IEA said.

IEA points to a "180-day period" for customers to adjust their purchasing strategies though it remains to be seen how waivers and other aspects of the sanctions will be implemented. In addition, other signatories to the JCPOA have said that they will continue with the agreement.

Brent prices above $80 bbl some say are overshadowed by the advancing spread between Brent and U.S. oil benchmark WTI. The spread, which hit a $7.79 bbl Brent premium Wednesday, is the widest since April 2015, and is an indicator of the rising levels of risk in dealing with world oil benchmark Brent amid rising geopolitical risk.

The growing WTI-Brent spread comes as a recent Energy Information Administration report expects a 144,000 bpd increase in U.S. shale oil production in June from May. Traders concede that while U.S. supplies, specifically from tight shales are rising, their presence in the market remains reduced because of limited pipeline capacity to move the supply to markets. Increased tight oil supplies, traders said, will have a more limited effect on increasing dwindling distillate stocks, as shale oil produces less middle of the barrel products, they said.

When sanctions were imposed in 2012, Iran's exports fell by about 1.2 mbd, IEA said. "It is too soon to say what will happen this time," they said, "but we should examine whether other producers could step in to ensure an orderly flow of oil to the market and offset a disruption to Iranian exports."

IEA said neither Venezuela nor Mexico can raise output in the short term, but some of the 1.5 million bpd that have been cut by other producers under the Vienna Agreement might be available to keep markets well supplied. A statement by Saudi Arabia shortly after the U.S. announcement acknowledged the need to work with producers and consumers to mitigate possible supply shortfalls.

"This is especially welcome since the possibility of lower Iranian exports is not the only supply risk hanging over the market today (Thursday)," IEA said in its monthly Oil Market Report.

Overnight, French oil producer Total said it would not be able to continue with a multi-billion dollar project in Iran unless it is granted a waiver by U.S. authorities. The company said in a statement that it cannot "afford to be exposed to any secondary sanction," including the loss of financing by American banks. Total wants U.S. and French authorities to examine the possibility of a specific project waiver following last week's decision by U.S. President Donald Trump to pull out of the Iran nuclear deal and re-impose stiff economic sanctions.

Brian Whary can be reached at brian.whary@dtn.com