Oil Futures Soften in Light Trade

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange mostly eased into the final close of August ahead of the Labor Day holiday, the unofficial demarcation line ending peak summer driving demand, while the October Brent and September oil products contracts expired at the close.

There was little news out to drive trading, although data released Friday morning showed strong business activity in the Midwest in July and buoyant consumer sentiment again in August, although easing from July's index.

The Chicago PMI eased from a very strong rate in July at 65.5 to 63.6 in August, with the decline suggesting a slowdown in U.S. economic growth. Still, the reading shows an ongoing expansion in business conditions in the Chicago area, with readings above 50 showing growth.

Likewise, the University of Michigan's Consumer Sentiment Index ended August above market consensus at 96.2, although down from July's 97.9 reading. Consumer sentiment did improve in late August, with the initial reading at 95.3.

These data points follow Wednesday's upwardly revised second quarter gross domestic product reading to 4.2% for the United States, with a strong economy translating into greater demand for oil.

In mid-August, oil futures plumbed monthly lows on easing concern over global oil supply and heightened worry U.S.-led trade disputes would slow economic growth and oil demand. Key support points held.

This week, concern over global trade eased after the United States reached a trade agreement with Mexico amid the North American Free Trade Agreement negotiations on Monday, with Canada rejoining the talks. Increasingly, there's a view that a hard-charging Washington is part of a negotiating strategy, although risks abound.

And while the slow bleed in Venezuelan oil production continues unabated, multiple reports show U.S. sanctions on Iran are having a greater effect upon the Islamic Republic's economy than anticipated. Iran sought intervention from the United Nations' International Court of Justice on Monday, indicating U.S. sanctions are harming its economy and should not be permitted. Also this week, Iranian President Hassan Rouhani was censured by the Iranian Parliament for his handling of the economy, although analysts see a power play unfolding, with Rouhani a moderate and parliament led by hardliners.

These developments suggest Tehran will take a hardline, and not relent to U.S. demands to end its provocative behavior in the Middle East or its pursuit of a nuclear bomb, reasons Washington reimposed U.S. sanctions. A first set of sanctions took effect on Aug. 6, with a more comprehensive imposition of sanctions that target Iran's oil exports taking effect in early November. One consultant group, Boston-based ESAI Energy, expects Iranian oil exports to drop by 1.1 million bpd because of the U.S. restrictions, with Iran oil exports at 2.3 million bpd in June.

Domestically, the Energy Information Administration shows U.S. oil production holding at an 11.0 million bpd record high, although rig activity slowed in August. U.S. oil companies deployed two rigs this week, but only one in August, with a slowdown in growth seen in the Permian Basin due to a lack of takeaway pipeline capacity.

NYMEX October West Texas Intermediate futures settled down $0.45 at $69.80 bbl, while up $1.08 on the week and $1.04 on a spot continuous basis in August.

ICE October Brent expired at $77.42 bbl, down $0.35, with November delivery settling $0.38 lower at $77.64 bbl. Brent gained $1.60 this week while on the month and on a spot continuous basis rallied $3.17 or 4.3% in August.

Brent's premium settled at $7.62 bbl, reaching a 10-week high this week amid heightened concern over global oil supply security. Brent is now backwardated, a bullish market structure.

NYMEX September ULSD futures expired down 0.7cts at $2.2413 gallon, up 3.91cts from prior Friday, while rallying 10.94cts or 5.1% on a spot continuous basis in August. October ULSD futures settled down 1.13cts at $2.2431 gallon.

NYMEX September RBOB futures expired flat, up two points, at $2.1437 gallon, rallying 6.58cts or 3.2% on the week, while nudging 1.46cts higher in August on a spot continuous basis. October RBOB futures settled down 1.2cts at $1.9970 gallon.

In the coming weeks, the RBOB contract will be under downside pressure with the transition to reduced gasoline demand and winter grade specifications following peak driving activity during the summer months, while ULSD futures and the crude grades are poised to move higher following their upside breakouts this week. ULSD futures are underpinned by gathering seasonal strength and below average inventory, with WTI and Brent futures supported by heightened concern over the effects of U.S. sanctions on Iranian oil exports and involuntary production declines in Venezuela, Libya and Angola.

Seasonal maintenance at U.S. refineries will cut into crude demand and slow the price advance in the fall, while also underpinning oil products with the reduced yield. Global oil demand would also be at risk should a trade war between the United States and China escalate. Meanwhile, the potential for a stronger U.S. dollar with an expected hike in the federal funds rate when the Federal Open Market Committee meets in late September would pressure WTI futures.

Brian L. Milne can be reached at brian.milne@dtn.com

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