Oil Futures Sell Off Tuesday

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange dropped back Tuesday following Monday's explosive rally triggered by a weekend attack on Saudi Arabia's oil infrastructure. Saudi officials Tuesday afternoon indicated the Kingdom will fully restore the 5.7 million barrels per day (bpd) in crude production shut-in by the attack before month's end, maintaining its reputation as a reliable supplier.

Saudi Energy Minister Prince Abdulaziz bin Salman, who assumed the position on Sept. 8, said this afternoon during a news conference in Jeddah the Kingdom will achieve production capacity of 11 million bpd by the end of September and 12 million bpd by the end of November. The energy minister, the first royal to hold the position, said Saudi oil production in October will be 9.89 million bpd, up from an August output rate of 9.805 million bpd in August. The production increase, likely an effort to refill storage drawn down following the weekend attack, is still well below the 10.311 million bpd quota allotted under a production agreement with the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers led by Russia.

NYMEX October West Texas Intermediate futures settled down $3.56 or 6% at $59.34 barrel (bbl) ahead of expiration Friday afternoon, with the November contract holding a $0.24 discount. ICE November Brent crude ended down $4.47 or 6.9% to a $64.55 bbl settlement, with its premium to spot-month WTI down more than $1 from Monday's $6.12 bbl six-week high.

NYMEX October ULSD futures settled down 9.42 cents or 4.5%, and the October RBOB contract fell 7.73 cents or 4.4% to $1.671 gallon at settlement.

Oil futures sold off sharply earlier in the session as news leaked that Aramco would restore full crude production operations in the next two to three weeks, but ended off their lows. Moreover, Tuesday's decline retraces only 50% or less of Monday's price run-up, as the market awaits possible retaliation by Saudi Arabia for Saturday's high precision attack on the Abqaiq oil processing facility and Khurais oil field.

Citing a U.S. official, Reuters this afternoon reported the United States believes the attack on Saudi's oil assets originated in southwestern Iran, not Yemen, where the Houthis who are battling a Saudi alliance claimed responsibility. The report also said the sophisticated attack involved cruise missiles and drones.

The Houthis are backed by Iran and, according to a recent editorial by U.S. Special Representative for Iran Brian Hook, are being developed by Tehran in similar fashion as Iran formed Hezbollah.

Iran and Saudi Arabia have been long engaged in a proxy war, and how Riyadh responds could sharply escalate the hostilities in the region and draw in the United States. This dynamic has elevated the geopolitical risk premium in oil prices.

The market now awaits weekly supply data from the American Petroleum Institute this afternoon and the Energy Information Administration Wednesday morning. Markets also expect the Federal Reserve to shave 25 basis points off the federal funds rate now in a 2% to 2.25% range, with the central bank to announce its decision 2 p.m. EDT Wednesday. The Fed will update its economic outlook for the United States too, with the central bank's most recent outlook released in June forecasting 2.1% annualized gross domestic product growth this year, slowing to a 2% expansion rate in 2020 and 1.8% for 2021.

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

(CZ)

Brian Milne