Oil Ends Higher on Supply Disruptions

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled at fresh multi-year and multi-week highs Friday ahead of July contract expirations for ULSD and RBOB futures and for the August Brent contract, as fear mounted about Saudi Arabia and Russia's ability to make up for lost crude amid supply disruptions spanning four continents.

Concern was heightened this week after the U.S. State Department said it would take a hard line against countries that continue to buy crude after U.S. sanctions take effect Nov. 4, stating that the Trump administration wants Iranian exports at zero. U.S. officials eased those demands somewhat later in the week, although the message appears to have been delivered. A Wall Street Journal report this week indicated Iranian crude exports dropped from 2.7 million barrels per day (bpd) in May to 2.2 million bpd, with the decline expected to accelerate. India, Iran's largest buyer, is now expected to sharply curtail Iranian oil imports despite saying in May that they did not recognize the U.S. re-imposed sanctions. European refiners are also reported to be reducing their oil exports despite their indication in May that they would look to avoid cooperating with the sanctions.

Atop of the decline in Iranian exports, oil exports from Libya have dropped as a civil war in the North African nation has reignited, with as much as 650,000 bpd of export capacity effected, which compares with May crude production at 955,000 bpd. There are indications that declining exports from Libya might endure longer than initially expected.

In addition, Venezuelan oil production continues to slump amid years of mismanagement and the more recent collapse of its economy, while the seizure of key export terminals in the Caribbean by ConocoPhillips after the oil company won a claim against the government for nationalizing its assets more than a decade ago have hastened the oil production freefall. Venezuela's oil production was reported at 1.392 million bpd in May, and is seen stumbling below 1.0 million bpd later this year. Venezuela, a member of the Organization of the Petroleum Exporting Countries along with Iran and Libya, was allotted a 1.972 million bpd output rate under the OPEC production agreement, which runs through year end.

Against this backdrop, OPEC and their 10 non-OPEC oil producing countries that includes Russia agreed to lift recent production levels by as much as 1.0 million bpd at meetings last weekend.

Since then, reports indicate Saudi Arabia is set to raise their oil production to nearly 11.0 million bpd in July, up from 10.03 million bpd in May. However, the sharply higher production rate leaves the world with limited spare capacity, a ripe environment for price spikes.

A Syncrude upgrader outage in Alberta on June 20 has shut-in 360,000 bpd of production, with the outage expected to last through the end of July, further exacerbating the supply crunch. And while U.S. crude production is at a record 10.9 million bpd high, there is concern pipeline constraints out of the Permian Basin in western Texas will limit further increases in output. This afternoon, Baker Hughes reported a four-rig decline in the U.S. oil rig count which slipped to an 858 six-week low.

ICE August Brent crude expired at a $79.44 per barrel (bbl) five-week high on the spot continuation chart, up $1.59, with the September contract up $1.62 or $79.23 bbl at settlement. The spot-month Brent contract is up $3.89 or 5.1% this week.

NYMEX August West Texas Intermediate settled up $0.70 at $74.15 bbl, the highest settlement on the spot continuation chart since November 2014, with September delivery ending at $72.46 bbl, up $0.65. August WTI futures gained $5.57 or 8.1% this week.

WTI futures rallied midweek after the Energy Information Administration reported a 9.9 million bbl draw in commercial crude stocks, with 20.0 million bbl of crude taken out of inventory during the first three weeks of June. Record-high demand by U.S. refiners and foreign buyers alike have prompted the steep drawdown.

Now expired July oil products contracts advanced to four-week highs, pulled up the gains in crude even as increased refinery runs at 97.5% of capacity -- a 13-year high run rate -- are expected to continue to boost gasoline production. In 2018 through June 22, EIA data shows U.S. gasoline production averaged 9.98 million bpd, up 253,240 bpd or 2.6% against the comparable period in 2017.

Strong demand for gasoline is expected to continue, with the summer driving season now in full swing as we approach the July 4th holiday. AAA forecasts a record-breaking 46.9 million Americans would hit the road and travel 50 miles or more during the holiday. EIA shows implied gasoline demand has averaged 9.28 million bpd this year through June 22, 181,000 bpd or 2.0% above the comparable period in 2017.

NYMEX July RBOB futures expired up 4.62 cents at $2.1791, a one-month high settlement on the spot chart, with the August contract up 4.57 cents at $2.1512. The July RBOB contract rallied 10.86 cents or 5.2% since prior Friday.

NYMEX July ULSD futures expired 3.11 cents higher at a one-month spot high of $2.2093 gallon, with the August contract settling up 3.07 cents at $2.2097 gallon. July ULSD futures advanced 8.39 cents or 3.9% on the week.

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