Oil Futures Rally on Perceived Squeeze

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and the Intercontinental Exchange Brent contract blasted higher on the first day of the fourth quarter when global oil demand is expected at a 100.3 million bpd record high. Brent, West Texas Intermediate and ULSD futures all settled near four-year highs and the seasonally soft RBOB contract at a one-month high.

Oil futures plowed higher on concern Iranian oil exports would continue to drop under the weight of a second round of U.S. sanctions on the Islamic republic that take effect in early November while Venezuela's crude production bleeds lower amid economic collapse in a country that at one time was one of the wealthiest in the world.

The rally in the crude grades comes despite record U.S. oil production, an increase in Russian oil output to a fresh post-Soviet high, and comments from Saudi Arabia in September that the kingdom would ensure customers received all the supply they sought. The rally suggests the market doubts the ability of world oil producers to offset lost oil barrels from Iran and Venezuela.

The Energy Information Administration pegs spare oil capacity held by the Organization of the Petroleum Exporting Countries to average 1.66 million bpd this year and at 1.332 million bpd in 2019, which compares with 2.09 million bpd in 2017 and a ten-year average at 2.33 million bpd.

Monday's rally follows efforts over the weekend by U.S. President Donald Trump to shore up oil supply, with the president contacting Saudi Arabian King Salman bin Abdulaziz on Saturday, according to media reports. On Sunday, Saudi Crown Prince Mohammad bin Salman was expected to discuss restarting oil production in the neutral zone with Kuwait that could yield as much as 500,000 bpd of oil.

Additionally, Trade Arabia reported Saudi Aramco, Saudi Arabia's state oil company, is set to boost capacity at two major oil fields in the fourth quarter by 550,000 bpd.

Reuters reported over the weekend that Russia increased oil production in September to an 11.347 million bpd fresh post-Soviet high from output at 11.21 million bpd in July and August.

The EIA said U.S. crude production reached a fresh record high at 11.1 million bpd during the third week of September, and last month forecast U.S. oil output would average 11.5 million bpd in 2019.

The Dow Jones Industrial Average surged Monday, closing in on the record high for the index reached in September on news the United States and Canada reached a trade agreement that replaces the North American Free Trade Agreement, with the U.S. and Mexico previously finalizing terms. The new agreement is called the U.S.-Mexico-Canada Agreement.

The news was followed by strong readings for U.S. manufacturing.

The PMI manufacturing index jumped from 54.7 in August to 55.6 in September, and contrary to a market consensus for decline to 54.5, driven by domestic activity. The Institute of Supply Manufacturing Index did fall from 61.3 in August to a still strong 59.8 in September that was within consensus.

"Comments from the panel reflect continued expanding business strength. Demand remains strong, with the New Orders Index at 60% or above for the 17th straight month," according to ISM analyst Kristina Cahill.

The U.S. dollar strengthened to a nearly three-week high in index trading against a basket of rival currencies.

NYMEX November WTI futures settled at $75.30 bbl, up $2.05, and at the highest settlement on the spot continuous chart since Nov. 24, 2014. ICE December Brent settled $2.25 higher at $84.98 bbl, with the previous high on the spot chart achieved on Oct. 31, 2014.

NYMEX November ULSD futures settled up 5.94cts at $2.4079 gallon, the highest settlement on the spot chart since Nov. 14, 2014. NYMEX November RBOB futures rallied 4.18cts to a $2.1275 gallon one-month spot high.

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

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