Oil Higher in Wednesday Trade

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange moved higher in early trade on Wednesday, as the market sees a tighter market for crude availability following U.S. sanctions slapped on Venezuela's state-owned oil company, PDVSA, and subsidiary CITGO late Monday afternoon.

In early trade, Nymex March West Texas Intermediate futures were up $0.65 near $53.95 per barrel (bbl). ICE March Brent gained $0.60 to near $61.95 bbl ahead of the contract's expiration Thursday afternoon, with April delivery trading at a roughly $0.20 discount.

Nymex February ULSD futures were up 0.35 cents at $1.9010 gallon, trading at a 0.25 cents premium to March delivery ahead of expiration Thursday. February RBOB futures were 2.15 cents higher near $1.3725, with the March contract at a 2.0 cents premium in front of Thursday's February contract expiration.

The sanctions are reducing supply of heavy crude oil needed by several U.S. Gulf Coast refineries, with the United States also ordering a ban on U.S. sales of light oil and diluent to Venezuela, which is mixed into Venezuela's heavy crude to make it marketable and expand yield.

U.S. Treasury Secretary Steven Mnuchin said on Monday in announcing the sanctions that U.S. companies could still buy Venezuelan crude, but those revenues would need to go into blocked accounts in the United States, denying Venezuelan President Nicolas Maduro's government the funds. The United States, Canada, and most South American countries last week recognized the head of Venezuela's National Assembly, Juan Guiado, as interim president following fraudulent elections last year reelecting Maduro to a second term as president.

Under pressure, Maduro has called for dialogue with Guiado, suggesting Russia, Mexico, Uruguay, Bolivia, or the Vatican could serve as mediators. The opposition believes the offer is disingenuous, with mass protests expected Wednesday.

Saudi Arabia expects the oil market to tighten up, but has no plans in lifting output to offset lost Venezuelan sales. Both countries are part of the founding five Organization of the Petroleum Exporting Countries.

OPEC, which includes Russia, agreed to 1.2 million barrels per day (bpd) in production cuts during the first six months of 2019, with the Saudis responsible for 322,000 bpd of the reduction. Earlier this week, Saudi energy minister Khalid Al-Falih said Saudi output cuts would be deeper than its quota, saying production would be 10.1 million bpd in February against a quota of 10.331 million bpd, and would remain below its quota throughout the six-month term of the agreement.

The latest developments come ahead of the Energy Information Administration's release of weekly supply data Wednesday morning. Late Tuesday, the American Petroleum Reserve reported U.S. commercial crude stocks increased a less-than-expected 1.1 million bbl during the week ended Jan. 25. API said gasoline inventories built by an as expected 2.15 million bbl during the week profiled, while inventory of distillate fuel edged up a modest 211,000 bbl versus market calls for a 2.0 million bbl draw.

These events coincide with meetings in Washington between senior trade representatives from the United States and China negotiating differences in their trade practices, which U.S. President Donald Trump has called unfair. Failure to reach an agreement by March 1 would result in an expansion in tariffs by the United States on Chinese imports on March 2, with Beijing expected to retaliate.

Federal Reserve Chairman Jerome Powell will speak Wednesday afternoon following the Federal Open Market Committee's two-day monetary policy meeting, with the Fed expected to hold interest rates unchanged. Reports suggest the market is still leery about the current Fed, believing it would tighten monetary policy too quickly, a sentiment Powell needs to quash.

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

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