CRANBURY, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange sold off sharply Wednesday as a large weekly build in U.S. commercial crude stocks assuaged market fears of a supply shortage in the fourth quarter as U.S. sanctions on Iranian oil exports take effect next month.
Midmorning Wednesday, the Energy Information Administration reported an unexpectedly large 6.5 million bbl build in commercial crude inventory in the United States during the week ended Oct. 12 that followed a 14.0 million bbl increase during the two preceding weeks, narrowing a year-on-year supply deficit from 61.0 million to 40.1 million bbl during the three-week period. The large build came despite shut-in production in the Gulf of Mexico of nearly 700,000 bpd during some of last week due to Hurricane Michael, with the EIA reporting U.S. crude production slid 300,000 bpd last week from a record high of 11.2 million bpd.
U.S. crude inventory increased as U.S. crude exports plunged and imports ramped up during the week profiled for a net-increase of 576,000 bpd, while 1.1 million bbl of crude oil was pulled from the Strategic Petroleum Reserve following a 1.3 million bbl drawdown in SPR stocks week prior. As of Oct. 12, domestic commercial crude supply was at a 15-week high at 416.5 million bbl.
The rapidly building inventory has erased the backwardation in WTI's forward curve, with the November contract settling at a $69.75 bbl one-month spot low, down $2.17, and the December contract ending down $2.06 at $69.70 bbl. November WTI options expired Wednesday afternoon, with the November WTI futures contract set to roll off the board at the Oct. 22 close of trade.
A stronger U.S. dollar, which rallied to a one-week high from 2-1/2 week low Tuesday, also weighed on WTI futures. The stronger dollar coincided with the Wednesday afternoon release of minutes for September's Federal Open Market Committee meeting.
The minutes affirm the central bank's reason for lifting the federal funds rate 25 basis points last month to 2.0% to 2.25%. Fed officials expect U.S. gross domestic product to grow an annualized rate of 3.1% this year, and at 2.5% in 2019.
The minutes show, "the projection for real GDP growth this year was revised up a little, primarily in response to stronger-than-expected incoming data on household spending and business investment. The projection for the medium term was not materially changed, in part because the recently enacted tariffs on Chinese goods and the retaliatory actions of China were judged to have only a small net effect on U.S. real GDP growth over the next few years."
ICE December Brent futures settled down $1.36 at $80.05 bbl, paring a loss to a $79.17 bbl 3-1/2 week spot low. Brent's premium to WTI widened to $10.30 bbl, the widest spread since June 11. The wide arbitrage supports a ramp up in U.S. crude exports.
NYMEX November ULSD futures settled down 2.91 cents at $2.3111 gallon, trimming a decline to a 3-1/2 week spot low at $2.9296 gallon. November RBOB futures settled down 5.86 cents at $1.9187 gallon—the lowest settlement on the spot continuous chart since March 13.
Brian L. Milne can be reached at firstname.lastname@example.org
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