Oil Mixed as Traders Take Profits

OLD BRIDGE, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude oil on the Intercontinental Exchange settled mixed Thursday as a lack of follow through buying following the establishment of new contract spot highs across crude and products caused values to tail off during the last 30 minutes of trade.

Futures values for West Texas Intermediate and Brent crude, ULSD, and RBOB gasoline all reached levels not seen since November 2014, driven by reports of strong motor gasoline demand and sizeable drawdowns in distillate inventories so far this year. Analysts added renewed concerns over Iranian sanctions and their potential effects on exports, along with reduced Venezuelan production also bolstered values.

Thursday's market on close selling from earlier highs saw contracts reach daily lows, as holders of open positions sold them to balance positions and take profits before the start of a new trading session and its attendant risk.

While prices finished mixed, traders hinted 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.

At the 2:30 PM ET settle, NYMEX June WTI futures finished unchanged at $71.49 bbl after reaching a spot contract high of $72.30 bbl earlier and later trending lower after failing to pass through major long-term resistance on the market's monthly chart at $72.36 bbl. ICE July Brent settled 2 cents higher at $79.30, though off its daily spot contract high of $80.50 bbl, having passed through the key psychological $80 bbl mark. NYMEX June RBOB futures settled 0.68cts lower at $2.2431 gallon after reaching a spot high of $2.2773 gallon earlier in trade, and June ULSD settled about a penny higher at $2.2808, after reaching a recent spot contract high of $2.3069 gallon.

"Market on close trade saw some downward pressure with June crude oil options expiry. Also the stock market pulled back a little bit so we finished sharply unchanged," said Phil Flynn, senior market analyst with Chicago-based The Price Futures Group. "The dollar was strong all day so that didn't help anything. Also products pulled back a little with crude."

A testament to recent strength in distillate pricing is that according to the American Petroleum Institute monthly report, April distillate deliveries of 4.2 million bpd jumped 6.0% from March and soared 11.0% compared with April 2017. API called this data point "surprising, since it runs counter to typical seasonality between March and April. This was only the fifth time on record since 1945 that distillate demand in April was greater than that from March."

Sunday's Venezuelan presidential elections are expected to change very little, analysts said, as crude production is expected to continue to decline.

Production in Venezuela, which derives 95% of its foreign currency earnings from oil sales, is now the lowest in decades outside of a brief strike in 2002-03. Analysts expect the pace of decline of oil production to continue to accelerate and by the end of 2018 output could have fallen by several hundred thousand barrels a day.

April International Energy Agency data showed Venezuela's production 550,000 bpd less than its target under the Vienna Agreement and this "excess" is more than Saudi Arabia's total commitment under the production agreement.

"The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap, not just in terms of the number of barrels but also in terms of oil quality," IEA said.

Venezuelan oil production has plummeted to 1.41 million bpd, less than half the average 2013 output of 3.02 million bpd. The historic collapse reflects a variety of factors, including the 2014 oil price crash, stunted investment, the loss of public managerial expertise and the government's long-standing practice of redirecting oil revenue toward social spending.

Supplies and investment in Venezuela are expected to wane as ConocoPhillips has threatened seizure of PDVSA assets in the Caribbean. A combination of reduced Venezuelan exports combined with a decline in Iranian oil exports, may create what some traders are calling a "perfect cocktail" for oil to hit $100 per barrel this year or next.

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