DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange reversed higher in afternoon trade Thursday, supported by falling U.S. crude oil inventories and an improving outlook for gasoline demand amid peak summer driving season. An ongoing dispute between Saudi Arabia and the United Arab Emirates on how to ease production quotas in the second half of the year continued to weigh on market sentiment.

On the session, NYMEX August West Texas Intermediates futures advanced $0.74 to settle at $72.94 barrel (bbl), with gains accelerating post settlement, and the international crude benchmark Brent contract for September delivery settled $0.69 higher at $74.12 bbl. Gains in the oil products outpaced those for the crude contacts, with the NYMEX August ULSD futures surging 3.13 cents to $2.1204 gallon and the front-month RBOB futures rallied 4.92 cents or 2.5% for a $2.2552 gallon settlement.

Thursday's higher settlements were spurred by a bullish inventory report from the Energy Information Administration showing nationwide crude stockpiles fell for the seventh consecutive week to about 7% below the five-year average, and gasoline demand surged above 10 million barrels per day (bpd) during the week leading up to the July Fourth holiday weekend.

U.S. commercial crude oil inventories move into a destocking pattern coincided with the reopening of the economies of large states such as New York and California, with elected officials removing the last of their COVID-19 restrictions to allow businesses to operate at full capacity.

Gasoline supplied to the U.S. market, a calculation that's used as a proxy for demand, held above 9 million bpd every week but one since May 14. In the week ended July 2, gasoline consumption jumped above 10 million bpd, according to EIA data, suggesting Americans hit the road with a vengeance in late June/ early July despite surging gasoline prices at the pump.

Bearish parts of the report were found for distillate fuels, with demand for the middle of the barrel product, which correlates with the country's economic activity, declined to below 4 million bpd and inventories increased above expectations to 138.692 million bbl. Domestic refiners, meanwhile, scaled back crude throughputs last week to 16.115 million bpd with a 92.2% utilization rate.

While investor focus shifted o EIA's inventory report Thursday, a dispute between Saudi Arabia and the UAE will no doubt quickly move to again dominate the market narrative until resolved. Russian Energy Minister Alexander Novak is reportedly working behind the scenes to bring both parties back to the negotiating table, with a prolonged stalemate between the two OPEC producers raising the risk of other members within the alliance abandoning their quotas.

OPEC+ in its existing deal, which runs through April 2022, is withholding about 5.7 million bpd in production. If agreed to the current production baseline, the UAE would keep a disproportional supply off the market compared to other members of the alliance as the country's quota was set in October 2018 before significant capacity expansion. If 2019 baseline was used for the country's production limits, the UAE could have produced at least 400,000 bpd more from the current 3.1 million bpd. Wall Street Journal reported that Abu Dhabi National Oil announced in November 2020 that it would invest $122 billion to boost its oil production capacity to 5 million bpd by the end of the decade.

Liubov Georges can be reached at liubov.georges@dtn.com