Oil Futures Close Lower on Stocks Build

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Intercontinental Exchange Brent futures contracts nearest to delivery settled lower Wednesday, following federal data showing U.S. commercial crude stocks increased for the first time in six weeks while domestic crude production ramped up to a fresh record high. Also under consideration were comments from U.S. President Donald Trump on Tuesday that the United States would ensure an adequate supply of crude later this year when sanctions take effect against Iran.

West Texas Intermediate futures hit an intraday low of $71.47 bbl as the Federal Reserve completed their two-day monetary policy meeting Wednesday afternoon and Fed Chair Jerome Powell spoke with reporters. The U.S. dollar also eased to an intraday low immediately following the release of the Fed statement, with central bank officials lifting the federal funds rate for the third time this year, up 25 basis points to a 2.0% to 2.25% range as widely anticipated. Another rate hike is expected before year end.

"Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate," read the FOMC statement. "Household spending and business fixed investment have grown strongly."

At midmorning, the Energy Information Administration reported a 1.9 million bbl build in commercial crude inventory to 396.0 million bbl during the third week of September, moving off a 43-month low, while down 75.0 million bbl or 15.9% against the same week in 2017. The supply increase comes as refiners began seasonal maintenance programs, with U.S. crude inputs down a steep 900,000 bpd to a 16.514 million bpd 4-1/2 month low and the refinery run rate slid 5.0% to 90.5% of capacity during the week profiled.

EIA also reported a fresh record high in domestic crude production, up 100,000 bpd to 11.1 million bpd during the week ended Sept. 21. The production increase follows a market mindset that U.S. output growth had stalled because of pipeline constraints bottling up production in the prolific Permian basin. News making the rounds this week that Plains All American would bring on line its Sunrise Pipeline Nov. 1, well ahead of an initial projection in early 2019, added price pressure.

"Sunrise anticipates that it will have received the requisite line fill by October 31, 2018, and that its system will be fully operational and capable of providing transportation services by November 1, 2018," states a tariff filing with the Federal Energy Regulatory Commission from Sunrise Pipeline LLC.

It's unclear how much oil the pipeline will flow in November, with capacity on the new system to reach 500,000 bpd. Current pipeline takeaway capacity from the Permian is 3.1 million bpd, with the EIA estimating production in the basin, located in West Texas and east New Mexico, at 3.427 million bpd this month.

The projected pipeline startup will come just days in front of the Nov. 4 imposition of U.S. sanctions on Iran's oil exports. Clipper Data's Matt Smith estimates Iranian oil exports are averaging 1.5 million bpd, down 700,000 bpd from the second quarter, and thinks they could fall another 500,000 bpd to 800,000 bpd as sanctions tighten their grip.

This lost supply dovetails with the continued decline in Venezuela's crude production that has fallen to lows not seen in decades, with output dropping by as much as 250,000 bpd from the August rate of 1.235 million bpd.

NYMEX November WTI futures settled down $0.71 at $71.57 bbl, and ICE November Brent futures ended with a $0.53 decline at $81.34 bbl. Brent's premium to WTI widened to $9.77 bbl, just shy of last week's three-month high. December Brent settled at a $0.55 discount to November delivery, which expires Friday afternoon.

NYMEX October ULSD futures settled down 0.55cts at $2.2998 gallon after consolidating within Tuesday's trade range, with EIA data bullish for the diesel contract. EIA reported a more-than-expected 2.2 million bbl draw from distillate stocks for the third week of September to 137.9 million bbl, while implied demand increased 139,000 bpd to a 4.291 million bpd four-week high.

November ULSD futures settled at a 0.39cts premium to the October contract, which expires Friday afternoon.

NYMEX October RBOB futures settled down 0.92cts at $2.0585 gallon, ending at a 1.23cts premium to November delivery ahead of its expiration Friday. EIA reported gasoline stocks increased a more-than-expected 1.5 million bbl to 235.7 million bbl during the week profiled, with supply at a record high for this time of year.

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

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