Oil Continues Down on Bearish Supply

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange closed lower Thursday, pressured by a combination of bearish supply data and continued concern an escalating trade war with China could affect global oil demand.

Wednesday's sharp selloff following EIA's weekly supply report saw West Texas Intermediate crude slump to levels not seen since mid-June, while international Brent traded its lowest in more than three weeks as EIA data showed a less-than-expected decline in U.S. commercial crude inventories. With Thursday's futures trade closing within striking distance of Wednesday's settlements, analysts said futures values could remain range bound pending additional news that would affect supply and demand.

"China tariffs are priced into the Brent market at the moment, with a total of $50 billion of tariffs so far implemented by the U.S. and China," said Andy Lipow, president of Houston-based Lipow Oil Associates. "We saw crude oil take a breather today (Thursday) in light of additional Chinese tariffs on some petroleum products, but the market remains under pressure from more than adequate supplies of gasoline and high refinery utilization rates as we head into the final weeks of the summer driving season."

EIA data showed gasoline stocks for the week ended Aug.3 rose 2.9 million bbl to 233.9 million bbl, while refinery runs increased 0.5% on the week with plants running at 96.6% of capacity. Demand for gasoline was down 532,000 bpd on the week to 9.346 million bpd, while imports rose 183,000 bpd to 935,000 bpd.

Analysts said supplies at Cushing, Oklahoma, which EIA estimated at 21.803 million bbl, their lowest since November 2014, could begin to increase as refinery margins improve and as refiners begin to implement fall maintenance programs and as seasonal summer-related driving ramps down.

"Due to the backwardation of (WTI) crude it makes no economic sense to hold onto crude oil, so you've seen Cushing stocks being liquidated over the last few months," Lipow said. "The market anticipates this will change as refiners go into maintenance which will be reflected in rising inventories at Cushing. It won't be long before we start talking about the fall refinery maintenance season which will reduce demand for crude oil adding to some additional price pressure."

Tuesday's start of economic sanctions on Iran will cut its ability to transact in U.S. dollar denominations and is expected to further slash Iran's oil exports as countries begin to pull back from trade under fear of financial punishment from the U.S. Oil sanctions, announced when the U.S. pulled out of the Iran nuclear accord in May, go into effect Nov. 4. and are expected to reduce Iran's exports by 500,000 bpd and 1 million bpd. Recent OPEC data shows a June oil output at 3.799 million bpd, off 2.1 million bpd or 0.31% from 2017's 3.811 million bpd production, while market watchers estimate Iran's July exports at between 2.7 million bpd and 3.0 million bpd.

At the 2:30 PM ET settlement, NYMEX September WTI futures declined 13 cents to $66.81 bbl, while ICE October Brent crude declined 21 cents to $72.07 bbl. NYMEX September RBOB gasoline fell 1.96 cents to $1.999 gallon, while September ULSD was marginally lower $2.1119 gallon.

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