Oil Futures Spike on Supply Outages

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled sharply higher Tuesday ahead of the 4:30 PM ET release of weekly supply data from the American Petroleum Institute amid trimmed exports of Canadian oil to U.S. and Canadian refiners and recent losses of Libyan oil exports.

Prices turned higher early Tuesday as traders purchased contracts as a hedge against reduced oil production from Libya and Canada, where an unplanned outage of an upgrader in Alberta threatens Canadian exports to the United States. At last report, Syncrude's 360,000 bpd Fort McMurray upgrader, which shut on June 20 due to a transformer outage, was expected to remain offline through the end of July.

In the Mideast, media reports indicate Eastern Libyan commander Khalifa Haftar's forces have ceded control of oil ports to a separate National Oil Corporation based in the country's east. The official state-owned oil company from Tripoli will no longer be allowed to export oil, they said. The ports and associated terminals account for around 650,000 bpd of production, roughly two-thirds of the country's total output. According to secondary sources cited by OPEC, Libyan crude oil production averaged 955,000 bpd in May.

Amid the supply disruptions, oil experts expect Tuesday's API report could be bullish as well.

"I am expecting crude oil stocks to decrease by about 2.4 million barrels," said Dominick Chirichella, director of risk management with EMI-DTN. "If the actual numbers are in sync with my projections, the year over year deficit…will widen to 85.1 million bbl while the comparison to the five-year average will now show a deficit of 5.3 million bbl."

Chirichella added that Canadian imports into the United States for the week ending June 15 decreased by 140,000 bpd to 3.571 million bpd and are now 154,000 bpd below the previous all-time record-high reached several weeks ago, according to data from the Energy Information Administration. He expects another decline to have occurred last week following the upgrader outage.

Tuesday's rally comes amid recent concern of reduced spare production capacity following meetings of the Organization of the Petroleum Exporting Countries and the 10-nation non-OPEC counterparts Friday and Saturday, when they agreed to add about 1.0 million bpd of oil back to the markets by moving into compliance with their two-year agreements reducing output by 1.8 million bpd.

OPEC and non-OPEC countries participating in the production scheme were over complying with their agreements due to involuntary cuts by some members, namely Venezuela, and the potential loss of exports from Iran later this year as U.S. sanctions take effect. During previous sanctions from 2012 to 2015, Iranian exports were down by 1.2 million bpd, and could again drop by a similar amount with the latest round of sanctions, the International Energy Agency recently said.

At the same time, Venezuela's oil production could drift below 1.0 million bpd, analyst say, as economic collapse continues and recent actions by ConocoPhillips to seize port assets contribute to May production levels of 1.392 million bpd, well below its allotted 1.972 million bpd under the production agreement.

These supply issues limit the volume of spare capacity, now concentrated in producers such as Saudi Arabia and Russia, fertile ground for sharp price increases.

NYMEX August West Texas Intermediate futures settled $2.45 bbl higher at $70.53, its highest close since May 25, while the September contract rallied $2.24 bbl to settle at $69.28.

Brent crude jumped $1.58 bbl at settlement to $76.31 bbl, while the September contract increased $1.59 bbl to $76.14 bbl.

The spread between WTI crude and Brent crude, a key measure of U.S. oil export profitability, narrowed to its lowest level since May 7, settling at a $5.78 bbl Brent premium.

NYMEX July RBOB futures settled 2.31 cents higher to $2.0746 gallon, its highest settlement since June 21, while August RBOB increased 2.28 cents to $2.0567 gallon.

July ULSD rose 2.86 cents to $2.1290 gallon, while the August USLD contract settled at $2.1325, 2.83 cents higher on the day.

Action in August Brent, and the July RBOB and USLD futures contracts is expected to remain brisk this week as Friday's contract expirations approach.

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