Oil Futures Spike Tuesday

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange surged in Tuesday afternoon trading, rallying as Hurricane Florence moves closer to the East Coast while escalating violence in Iraq and Libya threatens oil exports from the two members of the Organization of the Petroleum Exporting Countries.

More than 1.5 million people have been ordered to evacuate from the Carolinas and Virginia as Category 4 Hurricane Florence closes in on the heavily populated Eastern Seaboard, with Florence expected to reach category 5 hurricane strength before making landfall late Thursday, early Friday. The National Hurricane Center at 2 PM ET reported Florence's position at about 845 miles southeast of Cape Fear, North Carolina, with maximum wind speed of 130 mph.

Reports of outages at retail gasoline stations have emerged in the Carolinas amid the mass exodus, with Hurricane Florence expected to linger over the states, producing as much as two-feet of rain in Charleston, South Carolina, and in Wilmington, N.C.

The storm's current path keeps it away from refinery assets and production fields, but flooding and power outages are likely in parts of the affected area that would impact distribution terminals and potentially the Colonial Pipeline. The Colonial system has a roughly 2.6 million bpd capacity on its two main lines that transport gasoline and distillate fuel from the Texas-Louisiana refinery center northeast along the Atlantic Coast states, with its end point in Linden, New Jersey.

Colonial Pipeline operates at or near capacity. A shutdown in the Carolinas would affect supply availability in Mid-Atlantic and lower Northeast states.

While these concerns sparked Tuesday's rally, Hurricane Florence is more likely to become a bearish event, forcing school, government and business closings while people hunker down, erasing demand.

While eyes focus on Hurricane Florence, two more storms are churning in the Atlantic Ocean, with Tropical Storm Isaac expected to resume hurricane status and move towards the Gulf of Mexico. Models show Hurricane Helene will restrict movement within the Atlantic.

Globally, Monday's attack on offices for the National Oil Corporation in Tripoli following weeks of fighting in Libya was joined by intensifying violence in southern Iraq that risk reducing oil exports from those two countries. Along with concern over Nigeria's production and sliding output in Angola, the intensifying violence in Iraq has heightened concern over global oil supply availability in the fourth quarter, with Libya a perennial concern.

Trouble in these five OPEC countries comes alongside the ongoing slide in production in Venezuela, also a member of OPEC, where output could drop nearly 300,000 bpd from July's 1.278 million bpd production rate by year end.

Taking center stage is the decline in Iranian oil exports as U.S. sanctions tighten a noose around Iran's economy.

"Third-party ship tracking data indicate that several countries may have already reduced purchases of Iranian crude oil, and August estimates of waterborne crude oil exports from Iran to be 19% lower than the average during first seven months of 2018," said the Energy Information Administration in their Short-term Energy Outlook released this afternoon. "EIA estimates that Iranian crude oil production declined 0.2 million b/d from July to August."

Iran's oil exports were 2.3 million bpd in June.

A wide Brent premium to West Texas Intermediate at a nearly $10 bbl three-month high reflects the concern over a tightening global supply disposition in the fourth quarter. The wide spread also encourages U.S. crude exports, which could limit the bearishness for domestic crude prices during the refinery maintenance season. Refinery maintenance in the Gulf Coast is expected to be lighter than usual this fall following Hurricane Harvey last year that prompted out-of-scheduled work to be undertaken in some cases. Midwest oil refiners are working with a heavier-than-usual maintenance season.

NYMEX October WTI futures rallied $1.71 to a $69.25 bbl settlement, ending near a $69.55 four-day high. ICE November Brent crude futures settled up $1.69 at $79.06 bbl, and near a $79.29 one-week high. NYMEX October ULSD futures rallied to a $2.2572 four-day high ahead of a $2.2520 gallon settlement, up 3.42 cents. NYMEX October RBOB futures surged 5.5 cents with a $2.0142 gallon settlement, ending near a $2.0165 one-week high.

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

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Brian Milne