Oil Higher in Tuesday Trade

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures moved higher early Tuesday, consolidating within Monday's trade range, while the Brent contract on the Intercontinental Exchange continues to widen its premium to West Texas Intermediate as U.S. sanctions on Iranian oil exports closes in.

Traders are focusing on different dynamics for the U.S. and global markets, as a powerful Hurricane Florence approaches the Carolinas that could dampen demand, while falling Iranian oil exports signal a tightening global market in the fourth quarter.

Hurricane Florence, which weakened slightly from a category 4 intensity according to the National Hurricane Center at 8 a.m. ET, is expected to make landfall Thursday night, early Friday, and to cause massive damage. Florence could become a category 5 hurricane, which has prompted evacuation orders for one million people along the Virginia and Carolinas coastlines.

There are no refineries in the storm's pathway, but Hurricane Florence, with its winds felt 500 miles away, is disrupting shipping lanes, and could impinge upon operations on the Colonial Pipeline. The pipeline operator said it was closely watching the storm and making preparations, with the threat to the gasoline and distillate pipeline system with a 2.6 million barrels per day (bpd) capacity coming from potential flooding and power outages.

Colonial Pipeline, which transports oil products from the Texas-Louisiana refinery center northeast along the Atlantic coastline to an end point at Linden, New Jersey, has experience with operation disruptions following Super Storm Sandy nearly five years earlier. Extended power loss that shut operations prompted Colonial to deploy an army of generators.

Although one million evacuees will fill up their tanks as they motor to safety, another risk traders must contend with is potential lost demand amid school, business and government closings. Gasoline demand is already on the decline following the end of summer, with Hurricane Florence targeting the heavily populated Mid-Atlantic States.

Oil demand slows this time of year, and refiners schedule their extended maintenance programs for the fall and spring. Seasonal refinery maintenance will trim U.S. refiner demand for crude oil, which has limited the upside for WTI futures. So has a strengthening U.S. dollar.

In contrast, ICE Brent futures traded at a one-week high of $78.14 barrels (bbl) in early trading, as evidence rolls in that U.S. sanctions on Iranian oil exports are going to have a bigger effect than initially expected.

HFI Research estimates Iran's oil exports will drop 1.254 million bpd from their April high just above 2.8 million bpd in September. That decline comes ahead of U.S. sanctions targeting Iranian oil exports and its banking sector in early November, with an initial round of sanctions taking effect on Aug. 6.

The greater-than-anticipated influence U.S. sanctions are having on Iran's economy and exports is boosting Brent, the international price marker, as the market gauges if higher production from Saudi Arabia and Russia will be enough to backstop the loss. Moreover, Venezuelan crude production is on a downward trajectory amid the country's economic collapse, with production at 1.254 million bpd in July projected to decline to about 1.0 million bpd late this year.

News report indicate U.S. Energy Secretary Rick Perry met with Saudi Energy Minister Khalid as-Falih in Washington on Monday, with Perry set to meet with Russian Minister Alexander Novak in Moscow on Thursday.

Meanwhile, the Energy Information Administration shows U.S. crude production holding at a record 11.0 million bpd high. Additionally, 11.0 million bbl of crude oil from the Strategic Petroleum Reserve will flow to six oil majors in October and November.

Brent's premium to WTI is trading on either side of $10 bbl, a three-month high.

At 9 a.m. ET, Nymex October WTI futures were slightly higher at $67.60 bbl, with ICE November Brent up $0.30 near $77.65 bbl.

Nymex October RBOB futures were 1.5 cents higher near $1.9740 gallon, and the October ULSD contract had gained 0.4 cents to near $2.2220 gallon.

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

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Brian Milne