Oil Futures Gain, Shrug Off Strengthening USD

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

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the August Brent contract on the Intercontinental Exchange shook off early weakness and a stronger U.S. dollar to register gains Friday afternoon, bolstered by expectations for climbing oil demand and discipline by U.S. drillers to not flood the market with oil.

Friday's advance is also realized as a tropical disturbance in the Gulf of Mexico prompts some oil wells in the Gulf to be shut-in and is likely to temporarily disrupt loading activity as it nears Louisiana. Three, which has a 90% chance of becoming a Tropical Storm, is moving through the Gulf of Mexico on a northward path, according to DTN Weather. DTN meteorologists note rough seas in the central and western parts of the Gulf due to Three, with gale force winds expected to develop. Three is expected to make landfall early Saturday morning along the Louisiana coastline with heavy rainfall.

Growth in U.S. oil production is expected to remain restrained as investors demand capital discipline while OPEC+ has taken a cautious approach in adding barrels back to the market following sharp cuts during the pandemic. These factors, along with projections for strong growth in global oil demand later this year, pushed crude prices to better than two-year highs this week.

Add to this Wednesday's comments by Saudi Arabia's oil minister, Prince Abdul-Aziz bin Salman, that there's a "real risk" of an oil "super-cycle" as major oil companies, especially in Europe, eschew exploration and production spending for green initiatives. The Saudi prince was speaking at J.P. Morgan's virtual Robinhood investment conference.

Oil futures also found support this week on Friday's likely election of Ebrahim Raisi, Iran's chief justice, to the presidency, likely delaying the end of U.S. sanctions on Iran's oil exports. Raisi, a hardliner picked by Iran's supreme leader Ali Khamenei and under U.S. sanctions himself, has spoken against the Joint Comprehensive Plan of Action, with the 2015 agreement limiting the uranium enrichment level Iran is permitted. Iran has enriched uranium above that threshold following the U.S. withdrawal from the multilateral agreement, yet argues it is not making a nuclear bomb.

The Biden administration is eager to have the U.S. rejoin the JCPOA, but discussions slowed ahead of Friday's presidential election, and some suggest it will prove more difficult to reach an accord considering Raisi's position on the agreement. Raisi has signaled he would agree to the accord but is likely to drive a harder bargain that might not be palatable to Washington, delaying a sharp increase in Iranian oil exports.

The U.S. State Department issued the following statement regarding multilateral talks with JCPOA members today: "We have been able to achieve progress in the Iran talks but challenges still remain. We do not have the time frame for sixth round of talks."

Oil futures gained even as the U.S. dollar strengthened sharply for a third session sparked by this week's Federal Open Market Committee meeting, with FOMC's dot-plot indicating two rate hikes in 2023, a year earlier than expected. Some Fed followers also speculate the central bank would begin tapering its $120 billion in monthly purchases of Treasuries and mortgage-backed securities later this summer.

A gradual unwinding of the Federal Reserve's easy monetary policy appears on course for an earlier than expected start as inflation jumped the most in 13 years in May while the U.S. economy is strengthening faster than the central bank expected just three months ago. The Federal Reserve adjusted expected U.S. gross domestic product for this year up 0.5% for annualized growth of 7%.

While repeating numerous times that the central bank would tolerate higher inflation in order to drive gains in employment, Federal Reserve Chairman Jerome Powell this week acknowledged the high level of retirements during the pandemic obscures what the central bank would consider to be full employment. His comments follow an assessment by the Dallas Federal Reserve Bank estimating 1.5 million people retired during the pandemic, so full employment would be less than a year earlier.

These developments launched the U.S. dollar index to a new two-month high of 92.395 points Friday, settling the session up 0.34% at 92.209. Domestic oil trades inversely to the dollar.

July West Texas Intermediate futures settled $0.60 higher at $70.45 per barrel (bbl) ahead of expiration Tuesday (6/22) afternoon, with the August contract settling at a $0.35 discount to July delivery. August Brent crude futures settled up $0.43 at $73.51 bbl, with Brent's premium to WTI narrowing sharply in June. July RBOB futures reversed off a better-than three-week spot low at $2.1120 to settle 3.41 cents higher at $2.1683 gallon, and July ULSD futures ended the session up 2.64 cents at $2.0932 gallon.

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

Brian Milne