Oil Mixed in Early Friday Trade

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange (NYMEX) and Brent crude on the Intercontinental Exchange (ICE) continued mixed in early trade, with the RBOB contract rallying to a one-month high on strong demand, which reached the second highest weekly demand rate of the year last week.

Little change in NYMEX West Texas Intermediate and ICE Brent futures represents "the uncertainty the market is facing in view of the continuing tight products supplies and concerns the administration might release SPR reserves, so it a confused situation right now because you have arguments on both sides that carry considerable weight," said Al Levine, CEO and chairman of Washington, D.C.-based Powerhouse, a commodity hedge and trade advisory.

Levine noted recent geopolitical events have worked to influence market pricing, adding to trader uncertainty, although futures remain rangebound.

"Since the middle of July we've seen steady advances, but it has done little but bring us to the top of the range," he said. "Prices could be poised to break out and move higher."

Midweek, news broke that Houthi rebels attacked two Saudi oil tankers in the Bab al-Mendeb Strait in the Red Sea, with the Houthis battling a Saudi-led coalition in Yemen. The Houthis also said they have the naval capacity to strike ports in the region. In response to the attacks, Saudi Arabia said it would temporarily suspend movement through the Bab al-Mendeb Strait.

The Houthis have support from Iran which Tehran denies, while the attacks comes as Iranian oil exports are under pressure from upcoming U.S. sanctions. U.S. sanctions on Iranian oil exports take effect Nov. 4, with U.S. officials telling buyers of Iranian oil to zero out those purchases. Ahead of that deadline on Aug. 6, U.S. sanctions take effect that target Iran's purchase of U.S. dollars, with oil trading globally in U.S. dollar denominations.

A Reuters report indicated Hindustan Petroleum Corp., a refiner in India, was forced to cancel a 1.0 million barrels (bbl) cargo of Iranian oil earlier this month after its insurer refused to provide coverage because of U.S. sanctions.

Domestically, implied gasoline demand has averaged 9.335 million barrels per day (bpd) this year, up 149,000 bpd or 1.5% against year prior, according to the Energy Information Administration (EIA), with demand for the week-ended July 20 at 9.846 million bpd, just shy of the 9.879 million bpd record high reached in June.

For distillate fuel, EIA Friday reported commercial inventory ended the first half of the year at a 117.7 million bbl 14-year low, with demand at 4.12 million bpd, up 190,000 bpd or 5.0% against the comparable year-ago period.

"This increase is largely attributable to an increase in trucking activity, which is the leading use of diesel fuel. Demand for trucking services tends to be closely correlated to economic growth and industrial activity, both of which have been higher in the first half of 2018 compared with the first half of 2017," said EIA.

The Bureau of Economic Analysis reported U.S. second quarter gross domestic product increased at a 4.1% annualized rate, the largest quarterly growth rate in four years.

At last look, NYMEX August ULSD futures were flat at $2.1769 gallon ahead of its expiration Tuesday (7/31) afternoon, with the September contract at a roughly 35 points premium.

"We anticipate distillates to move higher into August to the $2.20 gallon to $2.25 gallon range, though gasoline which shouldn't be this strong right now, has demonstrated considerable strength and could continue to move higher as well," said Levine.

NYMEX August RBOB futures were near a one-month spot high of $2.1839 gallon, up 1.75 cents near $2.1800 gallon at last look, trading near a nickel premium to the September contract. August RBOB futures expire Tuesday.

NYMEX September WTI futures were little changed near $69.65 bbl. ICE September Brent was up 25 cents near $74.81 bbl ahead of a Tuesday expiration, with the September contract at a roughly 50-cent premium following the recent move into contango.

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