CRANBURY, N.J. (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange ended Friday's session flat and Brent crude on the Intercontinental Exchange settled lower, following midweek rallies to four-year highs on concern U.S. sanctions on Iranian oil exports would leave global oil supply short in meeting fourth-quarter world oil demand, expected at a record high 100.3 million bpd.
NYMEX oil products futures ended down for a second straight session, with ULSD futures reversing lower from Wednesday's $2.45 four-year high and the RBOB contract from a $2.15 one-month high.
Projections vary widely, but another 400,000 bpd of Iranian oil exports could be cut from a recently estimated 1.5 million bpd rate, which is down 800,000 bpd from June, as a second and more punishing phase of U.S. sanctions take aim at Iran's oil sales and banking sector starting Nov. 4. An initial round of U.S. sanctions took effect in early August.
Iran's lost oil supply coincides with an unabated decline in Venezuela's crude production amid economic collapse and years of mismanagement, with output, already at multi-decades low at 1.235 million bpd in August, seen declining to around 1.0 million bpd by year's end.
"[A]nalysts have a $100 target price for Brent by 2019, mostly due to Iranian sanctions. But traders are beginning to wonder if these concerns have been overplayed," said PFL Petroleum. "If our stockpiles continue to grow, and Russia and Saudi Arabia increase production, this may alleviate most of the negative pressure from Iran and Venezuela."
Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries and Russia, which heads a group of non-OPEC oil producers aligned with OPEC in a two-year production agreement, have agreed to lift their output to offset the lost barrels. Newswire reports indicate Saudi crude output is near a record high at 10.7 million bpd and Russian oil production at a post-Soviet high of 11.347 million bpd. Both countries have said they can produce more oil.
On Wednesday, the Energy Information Administration reported U.S. crude production at an 11.1 million bpd record high during the final two weeks of the third quarter. The growth rate has slowed amid pipeline constraints limiting the oil flow from the Permian basin in west Texas and east New Mexico, reflected in data released Friday afternoon by Baker Hughes showing a third straight weekly decline in the U.S. oil rig count through the week ended today, down two to an 861 four-week low.
NYMEX November WTI futures settled up a penny at $74.34 bbl, down from a $76.90 nearly four-year high on the spot continuous chart traded Wednesday, while up $1.09 on the week.
ICE December Brent futures ended the day down $0.42 at $84.16 bbl, and gained $1.44 on the week after retreating from Wednesday's $86.74 bbl four-year spot high. Brent's premium to WTI ended the session at $9.82 bbl, widening $0.35 this week, and reaching a $10.25 bbl nearly four-month high Thursday.
The wide arbitrage illustrates the concern over global oil supply availability, and is seen luring overseas buyers of U.S. crude. U.S. crude exports averaged 1.821 million bpd during the first three quarters of 2018, up 1.008 million bpd or 124% against the comparable year-ago period.
U.S. crude exports dropped 917,000 bpd from a nine-week high to 1.723 million bpd during the last week of the third quarter, according to EIA, with the decline in exports credited with an unexpected 8.0 million bbl build in commercial crude stocks for the week.
The big build was a factor in Thursday's steep price drop, with expectations seasonal factors would continue to boost domestic crude stocks in the coming weeks amid seasonal refinery maintenance taking place now. How much crude stocks would build over the maintenance season is uncertain, with some expecting U.S. crude exports to bounce back and mitigate the inventory refill rate.
NYMEX November ULSD futures settled down 0.74cts at $2.3923 gallon, although advanced 4.05cts on the week. NYMEX November RBOB futures settled down 1.43cts at $2.0861 gallon and ended the week down 1.51cts.
The seasonal backwardation in the front end of the RBOB forward contract is nearly erased, with the November-to-December spread narrowing 1.2cts gallon this week to a 0.35cts November premium. Gasoline stocks are at a record high for this time of year at 235.2 million bbl.
Several officials from the Federal Reserve this week, including Chairman Jerome Powell, offered a very bullish diagnosis of the U.S. economy, and said interest rates would remain low through 2020. Data released this week showed the manufacturing and services sectors again expanded in September, strong personal spending and consumer confidence, with some suggesting the United States is nearing full employment.
This morning, the Bureau of Labor Statistics reported the U.S. economy added 134,000 jobs in September, although indicated job growth was slowed by Hurricane Florence, which caused extensive flooding and destruction in the Carolinas. BLS also revised higher July and August job gains by 87,000, while reporting the unemployment rate dropped to 3.7% in September, the lowest it has been since December 1969, and down 0.5% on the year.
These developments portend strong demand for oil in the United States, although demand growth might be slowing globally.
"[T]he dollar is incredibly strong which should be a drag on commodities and the Fed is not backing down on raising interest rates. This should essentially slow down business development and demand for oil," said Phillip Streible, senior market strategist with RJO Futures. "I believe crude oil is setting up for a sharp correction back down to the mid 60s."
Brian L. Milne can be reached at firstname.lastname@example.org
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