Oil Futures Lower on Saudi Price Cut, Weak Macroeconomics

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearby delivery month oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Tuesday's session lower as weaker economic data in China and the United States joined with the spillover effect of Saudi Aramco's price cuts to put demand concerns back in focus, pressing the oil complex into the red to kick off a holiday-shortened trade week.

On the session, the NYMEX October West Texas Intermediate contract declined $0.94 to settle at $68.35 barrel (bbl), and Brent crude for November delivery fell $0.53 to $71.69 bbl. NYMEX October RBOB futures declined 2.4 cents to $2.1300 gallon, and front-month ULSD futures dropped 3.78 cents to $2.1216 gallon.

Tuesday's lower settlements came on the heels of Saudi Aramco cutting October price differentials for Asian buyers versus an Oman/Dubai basis for super light and light grades by $1.30 bbl; extra light by $1.20 bbl; and medium and heavy grades by $1 bbl from September levels. The cuts were much deeper than the month-on-month $0.13 bbl decline in the Dubai futures spread in August, which is said to be a key element in OSP calculations. The cuts also suggest an uncertain demand outlook as COVID-19 cases are still on the rise in many countries, including oil consuming leaders such as European Union and the United States.

Saudi's move on its crude selling price also follows an agreement among Organization of the Petroleum Exporting Countries and Russia-led partners announced Sept. 2 that they would continue with a 400,000 barrels per day (bpd) production hike in October. OPEC+ agreed in July to increase their production 400,000 bpd monthly until the 9.7 million bpd in output cuts made in April 2020 are restored, meeting monthly to affirm or adjust the policy should market conditions change.

Elsewhere, the Caixin/Markit services Purchasing Managers' Index fell to 46.7 in August from 54.9 in July, its sharpest contraction in China's sector in 16 months, while Eurozone retail sales in July also fell, down 2.3% month on month.

Domestically, Friday's Department of Labor nonfarm employment report for August showing a fraction of the 740,000 jobs expected with job growth of 235,000 -- the worst reading since January -- was a big disappointment and comes with heightened fears of the pandemic amid rising COVID cases. The deceleration in job gains was steep, with the Labor Department having also revised July's total higher to 1.053 million.

The poor showing clouds monetary policy by the Federal Reserve, with the Federal Open Market Committee to meet next on Sept. 21-22 to discuss when to pull back on spending. The Fed is buying $120 billion in treasuries and mortgage-backed securities while holding interest rates near zero. The Fed will also update its projection for the U.S. economy and the labor market.

Industry disruptions continue to be felt following Hurricane Ida, with the U.S. Department of Energy on Tuesday reporting five refineries in Louisiana with roughly 1 million bpd of capacity remained shut following the category four hurricane which made landfall on Aug. 29. Storm damage and a lack of electricity are delaying restart timetables for the refineries, with four previously shut refineries due to Hurricane Ida now in restart, including all three in Baton Rouge and one near New Orleans. Refineries in restart include ExxonMobil's 520,000 bpd Baton Rouge refinery, Placid Refining's 75,000 Port Allen refinery, and Delek's 80,000 bpd Krotz Springs refinery in the Baton Rouge area and Marathon's 578,000 bpd Garyville refinery -- Louisiana's largest, with the facility located west of New Orleans.

Both ExxonMobil's Baton Rouge refinery and Placid Refining's Port Allen refinery secured crude oil from the Strategic Petroleum Reserve because of challenges in securing feedstock from third parties. ExxonMobil borrowed 1.5 million bbl from the SPR and Placid Refining 300,000 bbl.

The Bureau of Safety and Environmental Enforcement this afternoon reported about 1.444 million bpd of oil production was still shut-in as of 12:30 p.m. EDT, accounting for 79.33% of current total output for the Gulf, down from 1.7 million bpd shut-in on Friday (9/3). There were 79 platforms out of a total 560 manned platforms evacuated Tuesday which represent 14.11% of current Gulf capacity, down from 133 on Friday.

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

Liubov Georges