Oil Rallies in Early Morning 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) are rallying in early trade on a combination of increased geopolitical risk and bullish U.S. supply data underpinned by a robust U.S. economy ahead of Tuesday's contract expirations for Brent and oil products contracts.

"It looks like were moving up a little bit here as the market seems to be reacting to the strong U.S. GDP data we saw last week and as we get closer to the Brent and U.S. product expirations," said Phil Flynn, senior market analyst with Chicago-based Price Futures Group.

The Bureau of Economic Analysis on Friday said the U.S. economy expanded at a 4.1% annualized rate, accelerating from a first quarter growth rate at 2.2% slowed by winter weather conditions.

Robust economic growth is reflected in data showing implied demand for products surged 399,000 barrels per day (bpd) to 21.7 million bpd during the week-ended July 20, according to the Energy Information Administration (EIA), the second highest weekly demand rate of 2018. For the year through July 20, implied demand for oil products is up 600,000 bpd or 3.0% against year prior. EIA also reported Friday that distillate stocks, which include diesel fuel and heating oil, ended June at the lowest level in 14 years spurred by increased demand for trucking and greater industrial activity.

EIA reported lower weekly stock levels for crude, gasoline and distillate fuel, with inventory at Cushing, the delivery location for NYMEX West Texas Intermediate (WTI) futures having been drawn down consistently since mid-May to minimum operating levels at 30.6% of working capacity.

"The market seems to be realizing that supplies in the market are going to remain tight as we head into the fourth quarter, with Venezuelan production off and Saudi oil threatened in the Bab al-Mendeb strait. Concern about these risk factors is keeping the market pretty fairly well supported today," said Flynn.

Venezuela's crude oil production was just below 1.4 million bpd in June, the most recent data available, with output from the member of the Organization of the Petroleum Exporting Countries (OPEC) seen below 1.0 million bpd by year's end following years of mismanagement and recent asset seizures by ConocoPhillips in the Caribbean where Venezuela had storage and export terminals.

In the Middle East, Houthi rebels that are fighting a Saudi coalition in Yemen, attacked two Saudi oil tankers in the Red Sea's Bab al-Mendeb Strait. The Houthis have support from by Iran, though Tehran denies involvement in the conflict.

Last week's attacks prompted Saudi Arabia to temporarily halt shipping through the strait. The attacks aren't seen disrupting supplies because Saudi Arabia can use an alternative East-West pipeline to bypass the strait.

Near 9 a.m. ET, the September NYMEX West Texas Intermediate futures contract was up $1.55 to $70.24 bbl. ICE September Brent crude traded 73 cents higher to $75.02 barrel (bbl), with the October contract at a roughly 50 cents premium. NYMEX August RBOB gasoline futures were up 1.36 cents gallon to $2.1755, while August ULSD was up 1.1 cents to $2.1662 gallon.

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