Oil Higher in Thursday Trade

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange continued higher in early trade Thursday, extending Wednesday's rally triggered by bullish weekly supply data from the Energy Information Administration and on rising concern global oil supply would tighten later this year as U.S. sanctions target Iran's oil exports and world consumption peaks in the fourth quarter.

"It looks like we're seeing some renewed buying coming into the market following Wednesday's drop in inventories and with the effects of Iran's sanctions looking a little more ominous," said Phil Flynn, senior analyst with Chicago-based Price Futures Group. "Increased geopolitical tensions and dropping supplies from Venezuela [are] giving good support to the markets heading into the holiday weekend."

Midmorning Wednesday, EIA reported across the board inventory drawdowns for U.S. crude and oil products on strong demand for the week-ended Aug. 24, with implied gasoline demand reaching a record weekly high at 9.899 million barrels per day (bpd). The late-month surge in gasoline demand, up 446,000 bpd last week, "could suggest we could potentially see record gasoline demand for the Labor Day weekend," added Flynn.

Labor Day marks the end of the summer driving season, with gasoline consumption set to decline in September. NYMEX October RBOB futures are trading at a 10.75 cents discount to the September contract which expires Friday afternoon, reflecting the seasonal decline in demand and the transition to higher RVP gasoline which is less costly to produce.

Internationally, Venezuelan oil production is expected to decline to about 1.0 million bpd by year's end, down nearly 300,000 bpd from July and 745,000 bpd from December 2017 following years of mismanagement and economic collapse.

Iranian oil exports could drop 1.1 million bpd according to ESAI Energy as a second round of U.S. sanctions takes effect in early November targeting Iran's oil exports and banking. The U.S. re-imposed sanctions on Iran earlier this month, targeting Iran's ability to buy and sell U.S. dollars and precious metal, among other restrictions.

Iran's oil exports averaged 2.3 million bpd in June, and reports indicate exports dropped 700,000 bpd during the first half of August from July.

Near 9 a.m. ET, NYMEX October West Texas Intermediate futures were up 34 cents at $69.85 barrel (bbl), trading at a $70.08 four-week high on the spot continuation chart overnight.

ICE October Brent stood at $77.61 bbl, up 47 cents ahead of its expiration Friday, trimming an advance to a fresh seven-week spot high of $77.95, with the November contract at a 30 cents premium at $77.91. Brent flips into backwardation with the expiration of the October contract, a bullish market structure.

Brent's premium to WTI widened to a roughly $7.50 bbl better-than two-month high this morning amid heightened concern over global supply tightness.

NYMEX September RBOB futures were up 1.25 cents to $2.1185 gallon, easing off a $2.1235 four-week spot high, while the October contract rose 1.02 cents to $2.01 gallon. NYMEX September ULSD futures surged to a $2.2575 better-than three-month high on the spot continuation chart overnight, up 0.66 cents to $2.2487 gallon near 9 a.m. ET ahead of the contract's expiration Friday afternoon, while October holds a roughly 0.6 cents premium to September delivery.

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