DTN Oil

CRANBURY, N.J. (DTN) -- West Texas Intermediate on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied to better-than-two-year highs on their respective spot continuous charts Tuesday. The gains came on expectations for increased global oil demand later this year, with the prospect of a sharp jump in Iranian oil exports pushed back amid tough negotiations in Vienna. A "significant tropical disturbance" in the Bay of Campeche with a heading for the Louisiana coastline this weekend could also disrupt offshore oil production in the Gulf of Mexico.

DTN Weather is tracking a "disorganized convection" in the Bay of Campeche with a favorable environment to allow for the tropical disturbance to develop into a tropical storm Thursday. Maximum wind speeds of 50 miles per hour are forecast for Saturday when the tropical storm is expected to sit just offshore Louisiana, making landfall on Sunday. While lacking the force of a hurricane, the tropical storm is expected to generate rough seas that could affect offshore drilling activity and loadings at ports in Texas and Louisiana, with heavy rains locally. As forecast, the storm is bullish for crude while bearish for gasoline, with heavy rains potentially limiting driving demand.

July RBOB futures settled fractionally lower at $2.1705 per gallon Tuesday. While the decline was modest, it was the third consecutive session with a lower settlement, as weaker-than-expected gasoline demand in late May and early June prompted a pullback from a three-year spot high settlement of $2.2122 on June 10.

July ULSD futures was also little changed on the session, up fractionally at $2.1123 gallon, with the upside restrained as the market looks for more evidence of demand growth. There are encouraging signs, with freight demand strong and expected to remain robust through year end at a minimum, underpinning support. Data from the Transportation Security Administration show travelers passing through TSA checkpoints at U.S. airports topped 2 million on Friday, June 11, for the first time since spreading COVID-19 cases were declared a pandemic in March 2020 and reached a high on Sunday at nearly 2.1 million. While bullish, lending support for the ULSD contract, which is holding above the $2.1091 200-day moving average on the monthly chart, TSA traveler throughput for the five days through Monday at 1.9 million was 25.6% below the comparable period in 2019. Meanwhile, jet fuel stocks were sitting at a 43.96 million-barrel (bbl) 20-month high on June 4, according to the latest data from the Energy Information Administration.

Market expectations for the weekly change in crude and product stocks offered little support for oil products, with a Wall Street Journal survey finding consensus for a 100,000 bbl build in distillate stocks and an 800,000 bbl draw in gasoline inventory to have occurred during the week-ended June 11.

Gasoline stocks increased 8.545 million bbl or 3.7% during the two weeks ended June 4 to 241 million bbl, and distillate stocks gained 8.1 million bbl or 6.3% to 137.2 million bbl, EIA data shows.

The WSJ survey found market expectations calling for a 2.9 million bbl drawdown in commercial crude oil stocks to have taken place last week, which would be the fourth straight weekly draw if realized. During the three weeks ended June 11, crude stocks were drawn down 11.982 million bbl or 2.5%, falling below the three-year average in late May.

American Petroleum Institute will release its weekly findings at 4:30 p.m. EDT, and the EIA their weekly report at 10:30 a.m. EDT Wednesday.

Expectations for another crude draw lent buying support for WTI, which rallied to a fresh 32-month high on the spot continuous chart at $72.31 per bbl, encountering resistance at the $72.36 38.2% retracement point for the 2006-2016 downtrend, and settled the session up $1.24 at $72.12 per bbl. August Brent futures printed a fresh 26-month high on the spot continuous chart at $74.19 per bbl, with resistance at the $74.61 200-day moving average on the monthly chart, and settled the session $1.13 higher at $73.99 per bbl.

The crude contracts were also supported by what has been characterized as intense multilateral negotiations in Vienna over the Biden administration's diplomatic push to have the United States rejoin the 2015 Joint Comprehensive Plan of Action agreement that the U.S. withdrew from in 2018 under the Trump administration. Now in their sixth round of negotiations, an agreement is not expected this week and could be delayed further as Iran holds presidential elections on Friday. Some analysts think a conservative could win the presidency, with Tehran's conservative lawmakers hostile in supporting the agreement, which restricts their ability to enrich uranium among other restrictions.

While discussions could turn on a dime, the market anticipated a deal in late May or early June, which would have also ended U.S. sanctions on Iranian oil exports, a non-negotiable demand from Tehran. The delay, and the prospect of no agreement, could hold back Iranian oil exports longer than previously expected, boosting Brent futures.

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