Oil Futures Surge, WTI Spikes 4.5%

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and Intercontinental Exchange Brent futures rallied on Wednesday, with the U.S. benchmark settling above $60 barrel (bbl) in response to a much-larger-than expected drop in domestic crude inventories, while unplanned shut-ins in the Gulf of Mexico due to tropical storm activity added to the bullishness.

Midmorning, oil futures shifted sharply higher after U.S. government data showed a hefty 9.5 million bbl draw in domestic crude oil inventories, which pressed stockpiles to 459 million bbl as of July 5. It was the fourth consecutive weekly draw, with commercial crude inventory registering a 26.5 million bbl or 5.5% drop over the period, easing concerns that the market is oversupplied. The large drawdown was mainly attributed to higher refinery rates last week, which increased to 94.7% from 94.2% a week prior, while U.S. exports gained 580,000 bpd to 3.048 million bpd, a surge of 50.4% against year ago.

Oil companies shut-in approximately 602,715 bpd or 31.89% of oil production in the Gulf of Mexico, the Bureau of Safety and Environmental Enforcement reported this afternoon, ahead of a tropical storm expected to reach the region Thursday into Friday. Offshore production in the Gulf accounts for 17% of total U.S. crude oil output, while nearly 45% of U.S. refining capacity is located along the Gulf Coast, according to Energy Information Administration.

Oil futures were also lent upside support after Federal Reserve Chairman Jerome Powell said Wednesday that the Central Bank has not seen a substantial improvement in U.S. economy in recent weeks, suggesting the Federal Reserve may cut interest rates at the Federal Open Market Committee meeting on July 30-31. The comments spurred risk-on sentiment in the markets amid expectations for more accommodating monetary policy, and propelled the S&P 500 and the NASDAQ Composite to touch record highs. The U.S. dollar weakened on Powell's comments.

NYMEX August West Texas Intermediate surged $2.60 to $60.43 bbl, the highest price settlement since mid-May, while ICE September Brent crude settled up $2.85 at $67.01 bbl.

NYMEX August RBOB futures added 7.83cts or 4% to settle at $2.0052 gallon after government statistics showed gasoline inventories fell by a steep 1.5 million bbl, bringing stockpiles into parity with the five-year average. Total motor gasoline stocks have fallen for four consecutive weeks, while implied gasoline demand moved 262,000 bpd higher last week to 9.754 million barrels per day (bpd), up 5.2% versus the corresponding week in 2018.

NYMEX August ULSD futures were up 8.04cts to a $1.9910 gallon settlement, supported by the afternoon rally in oil futures, even as distillate fuel stocks built for a second consecutive week, according to the government data.

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

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