Oil Futures Gain on Supply Worry

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and the Brent contract on the Intercontinental Exchange advanced for the third session this week, more than erasing Wednesday's losses, as concern over global supply tightness later this year underpins climbing values.

Goldman Sachs doesn't believe Brent crude will reach $100 bbl in the coming months, but Total's CEO, along with officials with the Mercuria and Trafigura global trading houses do, as U.S. sanctions on Iranian oil exports and freefalling oil production in Venezuela continue to remove available barrels from the global market.

Oil futures rallied this week after the Organization of the Petroleum Exporting Countries and their 10 non-OPEC oil producing partners in the 2016 Vienna agreement declined to lift output above the pact's quotas during a meeting Sunday. Part of the worry is that not all producers can increase their production, while Saudi Arabia, where most of the world's spare capacity resides, has been reticent in announcing plans to boost production out of concern in destabilizing OPEC's cohesion and that it could create a surplus next year. In 2019, OPEC expects non-OPEC oil producers to increase their production by 2.4 million bpd against a projected 1.5 million bpd growth rate in global oil demand.

U.S. crude production reached a fresh record high during the third week of September at 11.1 million bpd the Energy Information Administration reported Wednesday, with output up 1.608 million bpd from the start of the year.

The Brent and West Texas Intermediate crude grades held below Tuesday's highs, which were partly influenced on talk from U.S. President Donald Trump that the United States would ensure there was enough oil in the global oil market. The market made the inference that there would be a release of crude from the Strategic Petroleum Reserve. Energy Secretary Rick Perry turned back that assumption, indicating a release from the SPR would have short and medium-term effects on oil prices, but would be factored into the market and erode the bearish dynamic.

In late October, early November, 11.0 million bbl of crude oil will flow from the SPR to six major oil refiners following a bidding process concluded in August. The sale from the SPR was unrelated to market dynamics, authorized in previous years by Congress.

The U.S. dollar rallied to a 1-1/2 week high, slowing the upside for WTI, following Wednesday's announcement of a 25 basis point rate hike by the Federal Reserve, the third of the year, and will lift the key borrowing rate one more time this year. The central bank also revised higher U.S. economic growth for this year, now expecting the U.S. economy to grow at a 3.1% annualized rate from their 2.8% June outlook.

A growing economy bolsters demand growth for oil. Consumer sentiment is another bullish factor for gasoline demand despite moving out of the summer's peak demand season, with the market anticipating the University of Michigan's Consumer Sentiment Index for September will show a very bullish 100.8 when released Friday morning.

NYMEX November WTI futures settled up $0.55 at $72.12 bbl, just below Tuesday's 11-week spot high settlement at $72.28 bbl.

ICE November Brent crude futures settled $0.38 higher at $81.72 bbl, near Tuesday's better-than 3-1/2 year high settlement on the spot continuous chart, and at a $0.34 bbl premium to December delivery. The Brent November contract expires Friday afternoon.

NYMEX October ULSD futures settled at a better-than 3-1/2 year spot high at $2.3231 gallon ahead of its expiration Friday afternoon, up 2.33 cents, with November delivery ending at a 0.29 cents premium to the expiring contract.

NYMEX October RBOB futures settled at a nearly four-week high at $2.0824 gallon, up 2.39 cents with one more session to go, with November delivery settling at a 1.35 cents discount to the expiring October contract.

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

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Brian Milne