Oil Futures Down on Profit-Taking

OLD BRIDGE, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude oil on the Intercontinental Exchange settled lower Friday as traders took profits ahead of the weekend following earlier choppy trading gains as focus shifted to covering perceived supply tightness in gasoline and distillate inventories as the start of the summer driving season nears and refinery maintenance wraps up.

Uncertainty about the viability of renewed Iranian oil sanctions among European nations and the potential effects of Sunday's conflicted Venezuelan presidential elections also added to selling pressure ahead of the weekend, traders said.

At the 2:30 p.m. EDT settle, NYMEX June West Texas Intermediate futures were off 21 cents to $71.28 per barrel (bbl), though still near a level not seen since November 2014. ICE July Brent was off 79 cents to $78.51 bbl, after passing through key $80 bbl psychological resistance for the first Thursday since November 2014. NYMEX June RBOB futures settled just shy of 1.0 cent lower to $2.2333 per gallon following Thursday's $2.2664 gallon spot contract high, while the June ULSD contract, also active in market on close selling, fell 1.53 cents to $2.2655, following Thursday's $2.2934 gallon spot contract high.

"I think what we saw was kind of a slow Friday with profit taking in a market that has been in a rally phase for quite a long time," said David Thompson, executive vice president and technical analyst for Washington, D.C.-based PowerHouse, a commodity and trade advisory firm. "On the bullish side," Thompson continued, "the Venezuela situation is extremely serious because indications are that their refining capacity is down to about 10%. That output will have to be made up somewhere else... and guess what, we're it."

Absent new news headlines from the Middle East, trader focus on dwindling oil product inventories is evident in this week's supply data from the Energy Information Administration. The report showed distillate stocks as of May 11 were at 114.9 million barrels, a sizable 31.9 million bbl less than the equivalent period in 2017. Gasoline inventories stood at 232 million bbl, 8.7 million less on the year, while crude oil stocks at 432.4 million bbl for the week reported were off 1.4 million bbl on the week, though down a substantial 88.4 million bbl versus the same period in 2017.

As further evidence of stout demand, EIA reported total products supplied to markets, or implied demand, rose 4.5% or 882,000 barrels per day (bpd) from the equivalent week in 2017 to 20.536 million bpd versus 19.654 million bpd in 2017. Increased demand coincides with a reduction in net imports of crude and petroleum products by 41.9%, or 2.08 million bpd from the equivalent period in 2017.

Interestingly, even though ongoing refinery maintenance at U.S. refiners is expected to continue through Memorial Day, demand for crude and products at refineries increased 149,000 bpd or 1.6% for the week surveyed to 16.635 million bpd, spurred largely by the result of higher retail prices. On a yearly basis however, crude inputs to refineries were down 487,000 bpd from 2017's 17.122 million bd. Most traders expect refinery inputs as reported by EIA, to jump in the coming weeks as scheduled maintenance concludes and refineries ramp up gasoline production with the official start of the summer driving season.

And while somewhat dated, recent strength in distillate pricing is evident in 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, and represents only the fifth time on record since 1945 that distillate demand in April was greater than that from March.

Given the current tightening oil products supply situation, traders are now discounting a previous reliance on OPEC five-year supply averages as the primary driver for likely price direction, because the combination of ongoing Organization of the Petroleum Exporting Country supply cuts and continued reductions in production from Venezuela, Canada, and Mexico have virtually brought the market into balance, OPEC said. From January 2017 to April, U.S. crude oil and other liquids inventories decreased by 162 million bbl while OECD inventories declined by 234 million bbl. Over this same period, U.S. and OECD crude oil and other liquids inventories moved from 229 million bbl and 334 million bbl higher than their five-year averages to 16 million bbl and 2 million bbl less, EIA said.

Geopolitical concerns, while less newsworthy of late, remain a factor in crude prices currently near 41-month highs, traders said. Venezuelan oil production has plummeted to 1.41 million bpd, less than half the average 2013 output of 3.02 million bpd, they said. 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.

Uncertainty about the timetable for the implementation of renewed sanctions on Iran and the virtual collapse of Venezuelan oil output is heightened in that ConocoPhillips has threatened seizure of PDVSA assets in the Caribbean. Also, within hours after the U.S. decision to withdraw from the 2015 nuclear accord was announced, leaders of France, UK and Germany put out a joint statement saying they would remain parties to the Joint Comprehensive Plan of Action, and "remain committed to ensuring the agreement is upheld, and (would) work with all remaining parties to the deal to ensure this remains the case."

While industry estimates for the potential loss of Iranian crude exports vary between 300,000 bpd and 1 million bpd, a May 10 research note from Chicago-based CME group indicated this may not be the case. "Iran will probably continue to produce oil at a full pace and find willing buyers, although it may have to provide discounts," they said.

CME also noted China may decide to buy more oil from Iran, possibly under discounted long-term contracts, increasing China's influence in the region and circumventing U.S. sanctions. A reliance on Iranian exports could mean less demand for U.S. shale supplies currently being exported from the Gulf of Mexico, they said.

On Wednesday, energy watchdog group the International Energy Agency 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. Sanctions could affect Iran's oil exports, which IEA said are at 2.4 million bpd. In 2012 when sanctions were slapped on Iran, Iranian crude exports sunk by 1.2 million bpd.

IEA also highlighted a steep drop in Venezuela's crude production, with output at the lowest point in decades outside of production loss during the 2002-2003 strike. OPEC on Monday, citing secondary sources, reported Venezuela's crude production averaged 1.436 million bpd in April, down 531,000 bpd or 27% against year prior.

"Though we assume Venezuela's output will dip below 1 mbd, Iran's output may be more resilient," said Barclays in a research note this morning.

On the domestic supply front, Baker Hughes reported the weekly number of active U.S. oil rigs unchanged at 844 rigs, a 38-month high and the sixth consecutive week showing an increase. According to Baker Hughes, there are 124 more oil rigs in operation today then in 2017, with the count up 97 year-to-date. Forty-seven of those rigs deployed were activated during the second quarter. Combined oil and gas rigs increased by one to 1,046, up 145 rigs year-on-year. In Canada, rigs in operation increased by six 38, up two on the year. The Canadian oil and gas rig count is up four this week to 83, down two from year prior.

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