Oil Futures Rally in Dynamic Week

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied on the session and the week. An escalation in tensions between the United States and Iran ratcheted higher geopolitical risk, U.S. and China presidents agreed to meet, the Federal Reserve signaled rate cuts and the largest refinery along the East Coast was partially shut early Friday after multiple explosions.

NYMEX August West Texas Intermediate gained $0.36 to $57.43 barrels (bbl) at settlement, while surging $4.92 or 9.4% on the week on a spot continuous basis. ICE August Brent futures settled up $0.75 at $65.20 bbl, while $2.44 or 3.9% higher than prior Friday. NYMEX July RBOB futures rallied 6.98cts to a $1.8561 settlement, and surged 12.36 cents or 7.1% on the week. NYMEX July ULSD futures were up 3.15 cents at $1.9158 gallon at settlement, advancing 8.64 cents or 4.7% since prior Friday.

U.S. President Donald Trump said he called off a military strike on Iran moments before bombs were set to drop in retaliation for Iran's Islamic Revolutionary Guard Corps shooting down a military surveillance drone earlier this week that Tehran claims was flying over Iranian airspace.

"On Monday they shot down an unmanned drone flying in International Waters. We were cocked & loaded to retaliate last night on different [sites] when I asked, how many will die. 150 people, sir, was the answer from a General. 10 minutes before the strike I stopped it, not proportionate to shooting down an unmanned drone," Trump tweeted early Friday.

The developments follow last week's attacks on two oil tankers in the Gulf of Oman near the Strait of Hormuz that the United States blames Iran for, providing photos showing an Iranian patrol boat removing an unexploded mine off a Japanese tanker that was attacked. The other tanker is from Norway. Shipping rates are climbing as Persian Gulf shipping lanes become dangerous.

The events increase the chance for further escalation in hostilities between the United States and Iran, which is struggling under U.S. sanctions including on oil exports for Tehran's push for nuclear capacity and military adventurism in the Middle East.

Gasoline futures soared 7 cents Friday following three separate explosions and fire that erupted around 4 a.m. ET Friday at the Girard Point section of Philadelphia Energy Solutions' 335,000 barrels per day (bpd) Philadelphia Refining Complex. An alkylation unit, which makes alkylate, a high-octane gasoline blending component, was one of the units affected by the explosions. PES said the refinery is running at reduced rates.

The RBOB contract was boosted midweek after the Energy Information Administration reported gasoline supplied to the primary market reached a record high during the second week of June at 9.928 million bpd. Implied gasoline demand increased 2% against the year-ago pace during the four weeks ended June 14.

The Federal Reserve strongly hinted at two rate cuts in the coming months as inflation risk further weakens and trade tensions threaten economic growth. The market overwhelmingly expects a 25-basis point cut to be announced at their July 30-31 meeting, with the federal funds rate currently at 2.5%.

The S&P 500 Index ended at a record high Thursday, while flat in late afternoon trading near 2,956, rallying on the dovish policy path telegraphed by the central bank. The U.S. dollar continued to decline, ending down 0.42 at 95.718 Friday in index trading, a three-month low, and below the 200-day moving average for a second session.

Weakness in U.S. economic growth was suggested by Friday's flash composite purchasing manager's index which eased to 50.6 in June, below expectations, with both services and manufacturing slowing. At 50.1, the manufacturing fell to a 10-year low and just a hair above contraction, with 50 dividing growth and contraction; providing more evidence of slowing economic growth. PMI gauges both sentiment and new orders, with confidence falling sharply.

Trump earlier this week said he will meet with China's President Xi Jinping at the June 28-29 G-20 Summit in Osaka, Japan, ending a stalemate in trade discussions after Washington said China walked back previously agreed to terms. Top trade officials from Washington and Beijing will discuss details ahead of the meeting between the two leaders.

The Organization of the Petroleum Exporting Countries, Russia and remaining non-OPEC oil producing country contingency have agreed to meet July 1-2 to discuss an extension of their production agreement, delaying their meeting initially scheduled for Tuesday-Wednesday (6/25-26) until after the G-20 meeting. OPEC+ are expected to rollover their six-month agreement reducing production 1.2 million bpd for the second half of 2019. Saudi Arabia is reported to have further cut output in June after production dropped to a five-year low at 9.69 million bpd in May, well below their allotted 10.311 million bpd output rate under the OPEC+ accord.

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

(CZ)

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