Oil Futures Rally to 2-Week Highs

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Intercontinental Exchange Brent crude rallied to two-week highs in market-on-close trade in front of weekly supply data and ahead of an expected rate cut by the Federal Reserve that is seen sustaining the U.S. economic expansion and stirring demand for oil.

NYMEX September West Texas Intermediate futures rallied $1.18 to a two-week spot high settlement at $58.05 bbl (barrel), rallying despite a stronger U.S. dollar which reached a 97.96 two-month high in morning index trading. The dollar reached the high after the Conference Board reported consumer confidence surged in July to the highest point of the year, reversing June's gloomy outlook. The dollar trimmed its advance this afternoon.

Tuesday's rally also comes in front of Wednesday's contract expirations by ICE September Brent crude and NYMEX August oil products, with September and October Brent futures both settling up $1.01 at $64.72 and $64.63 bbl, respectively.

NYMEX August ULSD futures settled at a $1.9440 gallon two-week high, ending the session at an 86 points discount to the September contract. NYMEX August RBOB futures settled 3.35 cents higher at $1.8969 gallon, a 5.09 cents premium to the September contract.

Markets overwhelmingly expect the Federal Reserve to announce a rate cut Wednesday afternoon at the conclusion of the two-day Federal Open Market Committee meeting, which would be the first reduction in the federal funds rate now at 2.5% since 2008. Expectations are for a 25-point basis cut, with another interest rate cut seen as soon as September.

Markets were initially wagering on a 50-point basis cut to be announced this week, with a bigger cut seen having a more powerful reaction in markets based on historical evidence. However, strong job gains in June announced earlier this month caught the market by surprise. The Labor Department reported 224,000 nonfarm jobs were created by the U.S. economy last month, with the market expecting Labor to report job growth for July at 166,000 when they report on Friday.

The expected rate cut does follow concern over global and domestic economic growth however, indeed the reason for lowering borrowing costs. In its initial reading of second quarter economic growth, the Bureau of Economic Analysis reported the U.S. economy expanded at a 2.1% annualized growth rate, down 1% from the first quarter expansion pace.

The expected cut dovetails with easing monetary policy elsewhere, with the European Central Bank last week signaling a rate cut is coming in September along with monetary stimulus. The Eurozone economy is expected to have grown a negligible 0.2% in the second quarter when the flash estimate is released Wednesday morning, a six-year low, and in line with the growth rate for France reported overnight.

Challenging politics in the collective economy including a pending hard Brexit have stalled economic growth for the continent, with the U.S.-China trade dispute having an amplified adverse effect on European countries such as Germany.

The trade dispute has also slowed China's economy, where economic growth decelerated to a 27-year low. China's Purchasing Manager's Index for manufacturing set for release overnight is expected to show a modest improvement to 49.5 from 49.4 in June, with readings below 50 reflecting contraction.

U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer are meeting with Vice Premier Liu He of China in Shanghai through Wednesday, as trade talks between the two economic powers resume. Trade negotiations are expected to endure for months.

Higher oil futures also come ahead of weekly supply data from the American Petroleum Institute at 4:30 p.m. EDT, and the Energy Information Administration set for release 10:30 a.m. EDT Wednesday.

Market expectations are calling for commercial crude stocks in the United States to have declined for a seventh time during the week ended July 26. EIA reported crude supply at 445 million bbl on July 19, down 40.5 million bbl or 8.4% since June 7.

DTN estimates a 3 million bbl draw from commercial crude inventory occurred during the week profiled, with gasoline stocks seen down 1 million bbl, and distillate inventory to have increased 1 million bbl.

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

(BAS)

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