Oil Futures Surge Early Tuesday

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 early Tuesday, climbing on overnight news that a Russian plane was shot down over Syria, with Moscow blaming Israel for the lost reconnaissance plane and 15 servicemen.

Oil futures reversed off support overnight on the news, which heightens the geopolitical risk premium in oil prices, overshadowing an escalation in a trade war between the United States and China.

Reports indicate the Russian aircraft was shot down by Syria's air defense system which was activated to repel an Israeli attack on Iranian assets in the war torn country. Still, Moscow said it reserved the right to respond to the lost aircraft and deaths, pointing to Israel.

The war in Syria is complicated, with Russia and Iran allied with Syrian President Bashar Assad. Israel has vowed not to allow Iran to develop a military presence in Syria, and has attacked Iran's assets including weapons caches for months, with the Wall Street Journal indicating Israel has dropped more than 800 bombs on Iranian targets in the Middle Eastern nation. Moscow and Tel Aviv had developed a communications path to avoid confronting each other during the civil war. It's unclear on how that relationship will proceed following the overnight incident.

Separately, an initial round of U.S. sanctions on Iran that took effect in early August are having a greater-than-anticipated effect on Tehran and the Iranian economy. That's before another round of sanctions take effect in early November that target Iran's oil exports and banking sector. Iranian oil production dropped to a 27-month low in August, and Iran is again storing oil at sea as it losses buyers, a strategy deployed during sanctions that ran from 2012 to 2015.

Reports indicate Russia and the Organization of the Petroleum Exporting Countries will agree to increase their production by 1.0 million bpd when they meet this weekend in Algiers for an OPEC Ministerial meeting. The news follows comments from U.S. Energy Secretary Rick Perry late last week that, after meeting his counterparts from Russia and Saudi Arabia, the three countries—the world's top three oil producers, and OPEC would boost output to offset lost supply from Iran, as well as Venezuela, where oil output continues to decline amid an economic collapse.

The Syrian news has offset an escalating trade war between the United States and China, with Washington Monday night slapping another $200 billion in tariffs on Chinese goods that will take effect later this month and comes atop of $50 billion in tariffs that took effect in July. This morning, China said it will apply tariffs to $60 billion in U.S. imports. The escalating trade war between the world's two largest economies threatens growth in global oil demand.

The U.S. dollar sunk to a nearly two-month low in index trading, with a weaker dollar lending upside support for West Texas Intermediate futures.

Oil traders will also position in front of weekly inventory data due out later today from the American Petroleum Institute and Wednesday morning from the Energy Information Administration. Dominick Chirichella, EMI DTN Director of Risk Management, estimates U.S. commercial crude supply was drawn down 2.5 million bbl during the second week of September, while gasoline increased 200,000 bbl with 1.5 million bbl of distillate fuel added to inventory. Chirichella expects the refinery run rate to have declined by 1.2% for the week-ended Sept. 14. Genscape said Monday satellite imagery shows crude stocks at Cushing, Oklahoma, the delivery location for NYMEX West Texas Intermediate futures were drawn down 2.3 million bpd for the week profiled. If so, that would press inventory at the key delivery hub to minimum operating levels below 22.0 million bbl.

At last look, NYMEX October WTI were up more than $1 near $70 bbl, trading at a $70.42 bbl two-week high ahead of the contract's expiration Thursday afternoon. The November contract was trading at a $0.25 discount to the expiring contract in the backwardated market.

ICE November Brent futures were up $1.35 at $79.40 bbl.

NYMEX October ULSD futures rallied 4.05cts to near $2.2465 gallon, with the October RBOB contract 4.0cts higher near $2.0165 gallon.

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

(BE)

Brian Milne