Oil Futures Gain on Middle East Tension

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied 2.3% Thursday, rebounding off Wednesday's five-month low settlements after attacks on oil vessels in the Gulf of Oman near the Strait of Hormuz reignited geopolitical tensions in the Middle East.

NYMEX July West Texas Intermediate futures shifted $1.14 higher to settle at $52.28 bbl, recapturing some of the losses from Wednesday's selloff, while Brent crude on the Intercontinental Exchange finished the session up $1.34 at $61.31 bbl after settling below $60 bbl on Wednesday. NYMEX July ULSD futures settled 2.67cts higher at $1.8066 gallon, while July RBOB futures advanced 3.38cts with a $1.7299 gallon settlement.

WTI and Brent futures added a geopolitical risk premium Thursday afternoon following a torpedo attack against two international oil tankers near the Strait of Hormuz. U.S. Secretary Mike Pompeo said Islamic Republic of Iran is responsible for the assault, citing a U.S intelligence report and the high level of expertise needed to execute the operation. Iran immediately rebuffed the U.S. claim, while also alleging it dispatched search teams that rescued 44 sailors from the two vessels.

Oil tankers have become increasingly targeted over the past several weeks in the Persian Gulf, a critical waterway for about 40% of the world's seaborne oil shipments. Market analysts however debate the effect of such attacks on oil prices in an environment with a continued escalation in a U.S.--China trade war and weakening outlook for oil demand.

Organization of the Petroleum Exporting Countries revised lower on Thursday global oil demand expectations for 2019 by 70,000 barrels per day (bpd) for year-on-year growth of 1.14 million bpd. The revision was due to lower than expected demand in the first quarter by countries that are part of the Organization for Economic Cooperation and Development, including the United States where gasoline demand slowed against expectations. OPEC maintained expectations for non-OPEC supply to increase annually this year by 2.14 million bpd to 64.51 million bpd, with the year-on-year growth rate slowing from 2018 when non-OPEC supply surged 2.91 million bpd.

Oil futures were also bolstered on Thursday by steep declines in OPEC output, which fell in May to the lowest level in nearly five years. OPEC data showed output dropped 236,000 bpd to 29.876 bpd last month, driven by lower production in Iran, down 227,000 bpd to 2.37 million bpd, followed by Nigeria and Saudi Arabia. Saudi Arabia produced 9.69 million bpd in May, well below its 10.3 million bpd quota under the OPEC+ accord, as the kingdom looks to ensure strong compliance with a six-month production agreement set to expire at month's end.

Despite OPEC+ efforts to limit available supplies in the global market, U.S. crude and product inventories surged last week to a 23-month high, according to Energy Information Administration. Oil futures dipped into bear market territory on Wednesday, fueled by escalating concerns over slowing domestic economy and lackluster fuel demand.

Liubov Georges can be reached at liubov.georges@dtn.com

(CZ)