Oil Futures Sell Off on Demand Concerns

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- The final trade session of August brought with it a high level of volatility by New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange. Both sold off sharply on the session amid concern over demand, buy gained on the week with the exception of the RBOB contract, which ended at a six-month low. Oil futures are down sharply in August, punctuated by the gasoline contract as it transitions away from peak driving demand during the summer months.

Hurricane Dorian strengthened Friday, reaching category three intensity, and is forecast to batter the Bahamas this weekend as a powerful category four storm. At 2 p.m. EDT, Hurricane Dorian was 660 miles east of West Palm Beach, Florida, with DTN maintaining its forecast that the hurricane will make landfall along the Florida coastline early Tuesday with sustained wind speeds of 140 miles per hour (mph).

DTN explains there's a high level of concern Hurricane Dorian will slow over the warm waters near the Bahamas and rapidly intensify, subjecting the Bahamas and Florida to extended periods of hurricane conditions. Sustained wind speeds of 140 mph are forecast for Sunday, increasing to 150 mph on Monday. Flooding and destructive winds are expected in Florida from Monday through Thursday. DTN meteorologists project Hurricane Dorian will turn north while in Florida, moving through Georgia and the Carolinas, but note there remains uncertainty about the storm's path, and it could veer south into the Gulf of Mexico.

Gasoline prices in Florida soared as residents prepared for the "monster" hurricane, as described by U.S. President Donald Trump. However, the hurricane's aftereffects will likely dent driving demand, which already weakens following the Labor Day weekend. This concern offset positive comments from China Friday regarding trade discussions with the United States.

Friday's trading was also dotted with reports on oil production, with Reuters reporting production by the Organization of the Petroleum Exporting Countries increased 80,000 barrels per day (bpd) in August from a five-year low in July, with the output gain led by Nigeria and Iraq. Saudi Arabia maintained discipline with the OPEC+ supply agreement, which runs through the first quarter 2020, while Iran's oil production declined.

In contrast, Baker Hughes reported a second sharp weekly decline in the U.S. oil-rig count for this week, which fell 12 to a 742 20-month low, with 51 rigs deactivated in the third quarter and counting. The slide in the rig count aligns with reports of an increase in bankruptcies by shale oil producers in the United States as Wall Street tires of cash burn.

And while the market cheered the second week in 2019 with U.S. crude imports below 6 million bpd reported midweek, an occurrence that until this year hasn't happened since 1996, private tanker trackers point to a jump in imports in the coming weeks. Meanwhile, the Energy Information Administration reported U.S. crude production reached a record high 12.5 million bpd last week, with more efficient drilling practices offsetting the lower rig count. Higher imports would also come at a time when refiners will begin shutting units for seasonal maintenance.

In early trading, the Chicago Purchasing Manager's Index was released reporting a greater-than-expected jump to 50.4 from a depressing 4-1/2 year low in July on a sharp increase in new orders, which bodes well for the manufacturing and service sector outlook. However, 15 minutes later the University of Michigan's Consumer Sentiment Index showed an 8.6-point plunge to 89.8, the lowest reading since October 2016 -- one month ahead of the 2016 U.S. presidential election. Consumers overwhelmingly cited the U.S.-China trade war as a cause of concern.

The U.S. dollar fell to a session low on the bearish index, which also suggests consumers will pull back on discretionary spending that weighs on driving demand, but reversed higher to reach a 98.97 27-month high, bolstered by reported progress in U.S.-China trade talks.

At settlement, NYMEX October West Texas Intermediate futures were down $1.61 at $55.10 barrels (bbl), but up slightly on the week. In August, WTI futures dropped $3.48 or 5.9%.

ICE October Brent futures expired down $0.65 at $60.43 bbl, gained $1.79 or 3.1% on the week, but lost $4.74 or 7.3% on the month on a spot continuous basis. November Brent futures settled down $1.24 at $59.25 bbl.

NYMEX September ULSD futures expired 3.58 cents lower at $1.8282 gallon, yet edged up 1.54 cents from prior Friday, with the October contract settling at $1.8373 gallon. ULSD futures front month contract erased 12.68 cents or 6.5% in value in August.

The gasoline contract had the most dynamic price moves, contending with the shift to shoulder month demand while gasoline supply remains abundant. NYMEX September RBOB futures expired down 7.13 cents at $1.6134 gallon, and sunk 28.86 cents or 15.2% on a spot continuous basis in August. October RBOB futures settled down 4.51 cents at $1.5297 gallon.

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

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Brian Milne