Oil Futures Advance Last Day of Q3

CRANBURY, N.J. (DTN) -- Nearest-delivered oil futures on the New York Mercantile Exchange and Brent on the Intercontinental Exchange were moving higher in early trading Friday. Futures are set to post sizeable weekly gains on the final business day of September and the third quarter, and ahead of the October contract expirations for ULSD and RBOB futures and for the November Brent contract at the close.

Brent and the ULSD contracts have led this week's rally, with both commodities trading at better-than-3-1/2-year highs on their respective spot continuous charts, with ULSD futures rallying alongside Brent ahead of the heating season which begins in mid-October in the Northeast, the world's largest concentration of homes and small businesses that use heating oil to satisfy space heating requirements. Distillate stocks are below normal, holding under the five-year average since early March.

Brent futures, the international crude price benchmark, has rallied this week and in September on tightening global oil supply as a result of an unabated decline in Venezuelan crude production amid the South American country's failed social experiment and inept totalitarian government and falling Iranian oil exports due to U.S. sanctions. The United States will ratchet up the economic pressure on Tehran in early November when U.S. sanctions directly target Iran's oil exports and banking sector.

Amid this lost supply availability, the International Energy Agency projects global oil demand will reach a record high during the fourth quarter at 100.3 million barrels per day (bpd), with the demand pull for crude in December seen at a record high 84.5 million bpd.

This week's rally was triggered after the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries led by Russia decided against increasing production above quotas set in their 2016 Vienna agreement during a meeting on Sunday. Reports since note Saudi Arabia reticent to push for higher output during their meeting, with most countries unable to boost their output while any increase would take market share away from Iran. Tehran said it would veto any proposal to hike output above their quotas, with decisions by OPEC requiring unanimous support.

Spare crude capacity is limited, which will keep the market volatile in the coming months. According to Phil Flynn, senior market analyst with the PRICE Futures Group, the Energy Information Administration estimates OPEC's spare capacity at 1.4 million bpd, and expects it to slide to one of the lowest levels on record by late 2019 at 1.2 million bpd.

Brent's premium to West Texas Intermediate, the U.S. crude benchmark, widened to more than $10 bbl this morning, a 3-1/2-month high, reflecting the concern over shrinking global oil supply availability. The wide arbitrage will draw more buyers for U.S. crude, with data from the EIA showing U.S. crude exports having averaged 1.824 million bpd this year through the third week of September, up 1.04 million bpd or 133% against the comparable year-ago period.

ICE November Brent futures were up $0.66 at $82.38 bbl, trading at a nearly $0.45 premium to the December contract at 10 a.m. EDT, while up $3.50 this week and nearly $5 bbl in September.

NYMEX WTI futures were $0.20 higher at $72.32 bbl, about $1.50 above prior Friday's settlement, and nearly $2.50 bbl higher on the month.

A rallying U.S. dollar following the Federal Reserve's rate hike announcement on Wednesday joined by an upwardly revised growth forecast for the U.S. economy at 3.1% sparked the surge in the greenback, while the currency's gain is weighing on the WTI contract.

October ULSD futures traded at a fresh better-than-3-1/2-year high at $2.3308 gallon this morning, while up 0.6 cent at $2.3291 gallon at 10 a.m. EDT, with November delivery trading at $2.3325 gallon. ULSD futures are up 10.3 cents since prior Friday and nearly 9.0 cents in September.

October RBOB futures were up 1.38 cents at $2.0962 gallon at 10 a.m. EDT, holding a 1.2-cent premium to November delivery, and near a $2.0976 four-week high. RBOB futures are up nearly 8.0 cents this week while down 4.75 cents on the month following the end of peak demand during the summer months.

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

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