Oil Rallies in Early Trade

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange are rallying in early trade following Monday's advance, with the contracts trading at one-week highs ahead of weekly supply reports and the expiration of the September West Texas Intermediate contract at the close.

"WTI is leading the way up as a lack of light sweet crude oil in Cushing is impacting on the expiring September futures contract," said Andy Lipow, president of Houston-based Lipow Oil Associates. "In addition, supply concerns as a result of Iranian sanctions, as well as declining Venezuelan production are helping to offset concerns that demand growth is slowing."

NYMEX September WTI futures surged more than $1.50 to a $68.10 barrel (bbl) one-week high, while widening its premium to the October contract by more than $0.70, with October WTI up nearly $1.00 near $66.35 bbl. WTI futures are in backwardation, a bullish market structure in which the contract nearest to delivery trades at a premium to deferred delivery contracts.

Crude stocks at Cushing, the tank farm in Oklahoma that serves as the delivery location for NYMEX WTI futures, stood at 23.4 million bbl on Aug. 10 according to the Energy Information Administration, reflecting a 30.2% utilization rate. Stocks had been drawn down for 12 straight weeks into early August that lowered inventory to 21.8 million bbl, threatening lifting schedules. Analysts estimate minimum operating levels at Cushing are somewhere between 16.0 and 22.0 million bbl.

In addition to low stocks at Cushing, refinery runs have been strong in August, with crude inputs at a near record high near 18.0 million bpd during the week-ended Aug. 10 and the run rate at a 98.1% 20-year high, data from EIA shows.

Dominick Chirichella, EMI DTN Director of Risk Management, expects weekly supply reports from the American Petroleum Institute and the EIA will show the run rate remained strong, but eased 0.7% last week. He also estimates a 1.8 million bbl decline in crude stocks, a 2.0 million bbl drop in gasoline stocks, and 1.2 million bbl build in distillate stocks to have occurred during the week-ended Aug. 17.

"I think certainly as we get into refinery turnaround season next month we will see crude oil inventories begin to rise," said Lipow.

ICE October Brent futures were up about $0.60 at $72.80 bbl, near a $72.95 high. NYMEX September RBOB futures rallied to a $2.0386 one-week high, trading at about $2.0275 gallon at last look, up about 1.25 cents. NYMEX September ULSD futures gained about 2.5 cents at $2.1375 gallon, edging off a $2.1419 one-week high.

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