Oil Futures Rally on Hurricane Florence

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and the front-month Brent contract on the Intercontinental Exchange rallied for a second session Wednesday on several features headlined by a widening Hurricane Florence, with West Texas Intermediate settling at a nearly eight-week high and the ULSD contract at a 3-1/2-month high.

As Hurricane Florence, now a category 3 storm, nears the Carolinas, U.S. proposed talks on trade with China bolstered markets on optimism an agreement might be reached to stave off impending U.S. tariffs on Chinese goods, while weekly supply data released midmorning showed a larger-than-expected drawdown in commercial crude supply.

The National Hurricane Center at 2 p.m. EDT said Hurricane Florence was about 435 miles southeast of Wilmington, North Carolina, and 470 miles southeast of Myrtle Beach, South Carolina, with maximum sustained winds at 125 miles per hour. The Saffir-Simpson Hurricane Wind Scale defines a category 4 hurricane as having wind speeds between 130 and 156 mph. While weakening slightly, the wind field has expanded, according to aircraft data.

"The center of Florence will move over the southwestern Atlantic Ocean between Bermuda and the Bahamas today, and approach the coast of North Carolina or South Carolina in the hurricane warning area on Thursday and Friday and move slowly near the coastline through Saturday," said NHC.

Gasoline demand in the region has surged amid mandatory evacuations from the Carolina coastlines, with several retail outlets in the two states running out of gasoline. Restocking these stations could be delayed amid expected flooding and power outages.

Colonial Pipeline, which runs from an origin point near Houston and Pasadena, Texas, and runs through the Southeast and Mid-Atlantic states to an endpoint at Linden, New Jersey, said they are operating their two main lines at normal flow rates. Colonial's main line 1 carries gasoline and has a 1.4 million barrel-per-day (bpd) capacity, and the main line 2 transports up to 1.2 million bpd of distillate fuel.

Colonial said preparations continue ahead of the storm's landfall, adding Georgia facilities to the preparations due to "the storm's apparent shift in direction."

"Large, portable generators are on standby to be delivered to the storm zone in the event power is lost. These generators are capable of restoring limited service until commercial power is restored," said Colonial Pipeline today.

An interruption in service on the pipeline could create supply shortages in states in the Mid-Atlantic and lower Northeast, as was the case a year-ago due to Hurricane Harvey. The United States maintains an emergency gasoline reserve located in the Northeast, with 700,000 barrels (bbl) situated in the New York Harbor. Another 200,000 bbl are located in the Boston area, with 100,000 bbl positioned in South Portland, Maine.

Oil futures were also boosted midmorning after the Energy Information Administration reported a larger-than-expected 5.3 million bbl draw from U.S. commercial crude stocks that lowered inventory to a 396.2 million bbl 43-month low. EIA data was bearish for oil products, detailing a larger-than-estimated 1.2 million bbl build in gasoline stocks and a 6.2 million bbl increase in distillate fuel inventory that was well above market consensus.

Oil futures were buttressed on reports indicating the United States proposed a new round of trade talks with China ahead of the imposition of U.S. tariffs on $250 billion in Chinese goods. The U.S. has placed tariffs on $50 billion in Chinese goods, and on Friday, Sept. 7, U.S. President Donald Trump said he was set to move ahead with tariffs on another $267 billion in Chinese goods. Combined, the tariffs would represent the full value of U.S. imports from China.

An agreement settling the trade dispute would be welcome news for a number of U.S. businesses. The Federal Reserve this afternoon released its Beige Book which details economic conditions in the 12 Federal Reserve Districts.

The publication found that the U.S. economy expanded at a moderate pace through the end of August, with manufacturing activity growing at a moderate rate in most districts. "Transportation activity expanded, with a few Districts characterizing growth as robust," according to the Beige Book.

"Businesses generally remained optimistic about the near-term outlook, though most Districts noted concern and uncertainty about trade tensions—particularly though not only among manufacturers. A number of Districts noted that such concerns had prompted some businesses to scale back or postpone capital investment."

Separately, industrial production in the Eurozone contracted in July for the sixth month out of the past eight, down a more-than-expected 0.8% that matched June's downwardly revised reading.

NYMEX October West Texas Intermediate settled up $1.12 at a $70.37 bbl, the highest settlement on the spot continuation chart since July 20. A weaker U.S. dollar, which eased to a two-week low in index trading against a basket of rival currencies, also lent upside support for WTI.

ICE November Brent crude futures settled up $0.68 at $79.74 bbl, the highest settlement on the spot continuation chart since May 23. The Brent contract briefly topped $80 bbl with an $80.13 intraday high.

NYMEX October ULSD futures settled up 0.57 cent at $2.2577 gallon, a 3-1/2-month high on the spot continuous chart. NYMEX September RBOB futures ended the session with a 2.06 cent gain at $2.0348 gallon.

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

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Brian Milne