Oil Futures Probe Downside With Crude Build, Job Gain Miss

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Intercontinental Exchange Brent crude contracts nearest to delivery moved sharply lower Wednesday, settling at two-week lows. The moves were in reaction to an unexpectedly large build in U.S. commercial crude stocks that accelerated this week's downside probe spurred by a reassessment of oil demand expectations in the face of surging COVID infections in southeast Asia, while an industry report showed July job gains in the private industry were well below expectations.

A 3.627-million-barrel (bbl) build in commercial crude stocks reported midmorning by the Energy Information Administration for the final week of July ran counter to expectations for an inventory drawdown, with the build the result of a 585,000 barrel-per-day (bpd) drop in U.S. crude exports to a 1.904 million bpd nearly three-month low. The falloff in crude exports -- the second lowest weekly export rate in 2021 -- hints at weakening physical demand globally.

Distillate stocks also ran counter to expectations with an 832,000 bpd increase for the week ended July 30, with the build coinciding with a 738,000 bpd or 17% drop in distillate fuel supplied to the U.S. market to 3.618 million bpd. Implied distillate fuel demand averaged 3.766 million bpd during the four weeks ended July 30, 48,000 bpd less than the 3.814 million bpd three-year average for the comparable period.

The weak demand comparison against the three-year average while the U.S. economy is showing strong growth suggests supply chain and logistical challenges, including a labor shortage, are having an adverse effect on factory activity and freight movement, with Association of American Railroads Senior Vice President John T. Gray on Wednesday pointing to a "recent deceleration in rail volumes."

Gray said, "Grain exports are down sharply, taking rail carloads of grain down with them; automakers are still hampered by semiconductor shortages, leading to sharply lower rail auto volumes; and worldwide supply chain slowdowns are impacting both rail customers and railroads themselves."

Those issues have been popping up in various surveys conducted by Federal Reserve District Banks, and again Wednesday in a survey by the Institute of Supply Management for their Service Sector Index.

"Ocean freight costs have created a negative impact to our business," said a wholesale trade business. "The congestions at (the ports of) Long Beach/Los Angeles and Seattle have increased lead time by 15 days. Additional delays are occurring at the Chicago rail yard, (causing) two to three weeks of additional lead time."

The comments were made despite a strong reading for the index, which jumped 4% from June to a fresh record high at 64.1 and well above an expected 60.4 index. The service sector in the United States has expanded for 14 months.

Still, Wednesday's ADP National Employment Report suggests possible headwinds, with job growth of 330,000 in July well below expectations for 700,000 new jobs to have been added, while ADP revised June's job gain total down 12,000 to 680,000. The Department of Labor on Friday will release its nonfarm employment report, with expectations ahead of Wednesday's ADP reading calling for job growth of 900,000 for July.

Should growth in new jobs trend lower, it would complicate thinking at the Federal Reserve, with the central bank in June calling for the national unemployment rate, currently at 5.9%, to decline to 4.5%. It was at a 3.5% 50-year low in February 2020 before the pandemic struck. Federal Reserve Chairman Jerome Powell has been adamant about sustaining accommodative monetary policy until full job growth is realized. In doing so, however, inflation could take hold beyond what Fed officials have called transitory, wreaking havoc on the economy. In July, the consumer price index was 5.4%, a 13-year high for the inflation indicator.

Gasoline data was bullish, reflecting seasonal strength, with EIA's calculated implied demand figure showing a 450,000 bpd or 4.8% jump from the previous week to 9.775 million bpd for the week ended July 30. The strong demand figure alongside lower gasoline imports, which fell for the third week to an 845,000 bpd five-week low last week, led to a 5.291 million-bbl stock national drawdown. Gasoline stocks sat at 228.87 million bbl on July 30, 10.1 million bbl or 10.1% below the three-year average, and the lowest inventory since mid-November 2020.

NYMEX September West Texas Intermediate futures settled down $2.41 at $68.15 per bbl, with the October Brent contract on ICE sliding $2.03 in value to a $70.38-per-bbl settlement. NYMEX September ULSD futures ended down 5.23 cents at $2.0741 gallon, with the September RBOB contract settling at $2.25 gallon for a 2.08-cent decline.

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

Brian Milne