Oil Futures Grind Higher on Tighter Supply Fundamentals

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Following an explosive rally in the prior session, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange powered higher in early trade Thursday. U.S. crude benchmark briefly breached $71 barrel (bbl), propelled higher by expectations for tighter supply fundamentals for the balance of the year after OPEC+ producers agreed to maintain discipline and gradually unwind their output quotas and optimism that faster vaccine deployment across industrialized and developing economies would eventually slow the resurgent pandemic.

In early trading, NYMEX September West Texas Intermediate futures added $0.50 to $70.81 bbl, and the international crude benchmark Brent contract for September delivery gained $0.52 to $72.75 bbl. NYMEX August RBOB futures advanced 1.35 cents to $2.2302 gallon, with August ULSD futures up 1.25 cents near $2.0995 gallon.

The return of bullish sentiment came on the hill of the OPEC+ deal announced July 18, with the 23-nation alliance pledging to return a modest 400,000 barrels per day (bpd) a month in shut-in production through late 2022 after resolving a high stakes dispute between Saudi Arabia and the United Arab Emirates.

The Delta-variant-fueled wave of new infections across the globe surely will keep investors on the edge in coming weeks, but the argument for draconian lockdowns as deployed in the second quarter 2020 is unlikely given the progress in vaccine deployment. Domestically, over 161.9 million Americans have been fully vaccinated, accounting for 48.8% of the total population, according to the latest data from the Centers for Disease Control and Prevention. Among people 65 and older -- the most vulnerable population -- vaccination rates stand near 80%. Higher vaccination rates among vulnerable groups should limit hospitalization and death rates as experienced during the first wave of the pandemic, erasing grounds for reinstated quarantine restrictions on business and movement.

In the United Kingdom, where almost 55% of the total population has received a COVID shot, the advisory group to the Emergency Task Force found hospitalizations should peak at one-third of the winter wave before abating, with fewer severe cases and shorter hospital stays on average.

"If this proves to be the case -- with the U.K. the case study for all developed markets -- then Monday's move has overshot," said Goldman Sachs analysts in an investor note this week, referring to the sell-off at the start of the week triggered by the resurgent pandemic.

Global COVID-19 infections continued to rise exponentially at midweek, with record rates reported in South Korea, Thailand and parts of the European Union. U.S. President Joe Biden extended an international travel ban this week, including nonessential travel at the U.S.-Canada border until Aug. 21. The prospect for reopening trans-Atlantic air travel this year has been thrown into question given the trajectory of the virus spread in the fall/winter season.

Thursday's move higher came despite inventory data from the U.S. Energy Information Administration showing nationwide crude stockpiles rose for the first time since early May last week and refiners scaled back run rates for the third week in a row. Gasoline supplied to the U.S. market, a measure for demand, stalled near 9.29 million barrels per day (bpd) last week -- about 2% below the five-year average. Recent demand data continues to underwhelm market expectations that pent-up demand for domestic road travel this summer would send gasoline consumption even higher.

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

Liubov Georges