Oil Reverses Overnight Highs Wednesday

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Brent futures on the Intercontinental Exchange were again lower in early trading, reversing off overnight highs ahead of weekly supply statistics from the Energy Information Administration that are now expected to show a build in commercial crude stocks.

Expectations for a 1.5 million barrel (bbl) draw from U.S. commercial crude inventory to have occurred during the week ended Nov. 23 have been shaken following weekly data from the American Petroleum Institute, reporting a 3.453 million bbl build in domestic stocks. A build reported by the EIA would mark the 10th consecutive week through Nov. 16 with an increase. U.S. commercial crude inventory reached a nearly one-year high at 446.9 million bbl.

Crude deliveries from the Strategic Petroleum Reserve following an auction in August have not been fully dispersed, with EIA data showing 7.441 million bbl of deliveries made against 11.0 million bbl of sales.

API did report a 2.62 million bbl drawdown in gasoline inventories, with the decline implying strong on-road travel demand during the early part of the Thanksgiving holiday travel period, with the weekend not counted. Blizzard conditions in the Midwest over the past weekend could have weighed on travel demand for next week's report.

Distillate stocks increased 1.185 million bbl during the week profiled, API data shows. EIA shows distillate inventory as of Nov. 16 at 119.2 million bbl, a 4-1/2 month low, with forward days of supply at a 27-day five-year low.

EIA will release its report at 10:30 a.m. ET.

Oil futures are again testing recent lows ahead of the data, with the ULSD contract trading at a fresh 8-1/2 month low on the spot continuous chart. The market continues to probe downside support points amid an overwhelming bearish pale that dominates market psychology.

The market fears the formation of another global supply glut in early 2019, with the International Energy Agency projecting global oil demand would decline from a record high 100.1 million bpd in the fourth quarter to 99.2 million barrels per day (bpd) in the first quarter—cyclically the weakest quarter for world oil consumption.

Those concerns are amplified by signs of slowing global economic growth, with a strong U.S. economy also seen tapping the brakes. The U.S. Bureau of Economic Analysis Wednesday morning reported third quarter U.S. gross domestic product annualized growth at 3.5%, down from 4.2% in the second quarter, with market consensus suggesting a further slowdown in the current quarter to 2.7%.

One of the major headwinds for the U.S. and world economies is a U.S.-China trade dispute, which has adversely affected China's economy, where the industrial and manufacturing sectors are barely growing, and could show contraction before the year is out. China will release manufacturing data Friday and Sunday nights.

In between those releases, President Donald Trump will dine with Chinese President Xi Jinping in Argentina after attending the G-20 meeting being held Friday and Saturday. Larry Kudlow, the director of U.S. National Economic Council, said Tuesday that there's been a great deal of communication between U.S. and Chinese officials at all levels ahead of Trump-Xi meeting. Failure to reach an agreement could escalate the trade dispute, with Trump indicating his readiness to deploy additional tariffs on Chinese imports in January.

Russian Oil Minister Alexander Novak and Saudi Arabian Oil Minister Khalid al-Falih will also attend the G-20 meeting ahead of the Dec. 6 meeting between the Organization of the Petroleum exporting Countries and 10 non-OPEC oil producers led by Russia that are in the final weeks of a two-year production agreement. The Saudis are said to seek an extension of the production agreement into 2019, which would drop their crude production 1.0 million bpd from the 11.0 million bpd output rate reached earlier this month. Russia is not keen on lowering production, with Russia boosting output to a post-Soviet high of 11.41 million bpd in October. Russia is taking market share from Iran in the European Union, taking advantage of U.S. sanctions on Iranian oil exports.

In early trading, Nymex January West Texas Intermediate was down $0.50 near $51.05 bbl, with additional pressure on the WTI contract coming from a stronger U.S. dollar, which is trading at a two-week high, and near the midmonth 17-month high for the currency.

ICE January Brent is down $0.70 near $59.50 bbl ahead of its expiration Friday afternoon, with the February contract at a roughly $0.25 premium.

Nymex December ULSD futures were down 2.3 cents at $1.8630 gallon, with January delivery at a 0.30 cents premium. Nymex December RBOB futures were down 0.35 cents near $1.4175 gallon with January delivery at a nearly 2.0 cents premium to the December contract.

The December ULSD and RBOB contracts also expire at Friday's closing bell.

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

(CZ)

Brian Milne