Oil Futures Rally; ULSD Surges to 35-Month High

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 Brent crude on the Intercontinental Exchange rallied Thursday on a combination of continued production shut-ins in the Gulf of Mexico, natural gas shortages in Europe, a weaker U.S. dollar and a broad-based rally in equities as the Federal Reserve held off immediately pulling back monetary stimulus programs initiated in the early days of the COVID pandemic.

The rally reversed early losses and followed missed market expectations for manufacturing and service sector growth in the Eurozone and United States in September while first-time U.S. unemployment claims unexpectedly increased, accelerating selling in the U.S. Dollar Index. The U.S. Dollar Index reversed down from a 93.530 four-week high in an outside down session to settle 0.46% weaker at 93.030, paring a decline to a 92.965 one-week low.

Selling accelerated after the Labor Department reported first-time filings for unemployment insurance increased 16,000 to 351,000 during the week ended Sept. 18 from an upwardly revised reading the previous week, widely missing expectations for a decline to 309,000. The missed call on weekly jobless claims was followed by a lower-than-expected reading for the U.S. composite Purchasing Manager's Index at 54.5 against market consensus for a 55.5 reading. The manufacturing component of the index was 60.5 against expectations for a 60.8 reading, with services at 54.4 versus an anticipated 55.1 reading. Both readings show growth, with manufacturers struggling to keep pace with a robust book of business amid supply chain issues, while the latest COVID wave dulls interest for services such as restaurants and entertainment.

Composite PMIs in Europe released early Thursday also missed market expectations while showing continued growth.

The slowdown in U.S. PMI was preceded by a downgrade in the Federal Reserve's economic growth expectations, with the central bank late Wednesday revising its forecast for U.S. gross domestic product for 2021 from its 7% estimate in June to 5.9%. The Fed also lifted inflation expectations from three months ago from 3% to 3.7%, and revised higher the 2021 projected unemployment rate 0.3% to 4.8%.

Countering those misses was ongoing stimulus policy by the Federal Reserve even as Chairman Jerome Powell said Wednesday afternoon "it will be suitable to finish tapering around the middle of next year," referring to the central bank's $120 billion in monthly purchases of U.S. bonds and mortgage-backed securities. Tapering isn't expected to begin until the fourth quarter, with the Federal Open Market Committee to meet next Nov. 1-2. Those plans could come undone if the U.S. labor market deteriorates.

Those comments helped fuel Thursday's rally in equities, which overlooked the potential for a government shutdown next month. Republicans and Democrats are at odds over raising the debt ceiling, with the White House on Thursday telling federal agencies to prepare for a possible shutdown on Oct. 1. The Dow Jones Industrial Average closed up more than 500 points and the S&P 500 gained 1.2% to just below 4,500.

The weaker U.S. dollar lent support for West Texas Intermediate futures, which has an inverse relationship since crude is primarily traded in U.S. dollar denominations globally. WTI futures were also bolstered by ongoing production shut-ins in the Gulf of Mexico following Hurricane Ida four weeks ago, with Shell this week announcing significant damage to a key oil platform and transfer station that the oil major expects will remain shut until early 2022. The Bureau of Safety and Environmental Enforcement this afternoon reported 294,414 barrels per day (bpd) of current oil production in Gulf waters still offline.

November WTI futures rallied to a nearly eight-week high on the spot continuous chart at $73.50 barrel (bbl), settling near the high at $73.30 bbl, up $1.07. ICE November Brent futures shot up to a $77.35 12-week spot high, settling $1.06 higher at $77.25 bbl.

A senior U.S. State Department official was reported as saying Thursday that there was no movement in resuming discussions between the United States and Iran about returning to the Joint Comprehensive Plan of Action reached in 2015 from which the United States withdrew in 2018 during this week's United Nation's General Assembly. Both Washington and Tehran have expressed interest in restarting talks, which were suspended in June.

NYMEX October ULSD futures surged to a $2.2511 gallon 35-month high on the spot continuous chart, settling the session at $2.2491 for a 3.75-cent gain.

Distillate fuel stocks in the United States have been drawn down for four consecutive weeks through Sept. 17, Energy Information Administration data shows, with stocks down 9.117 million bbl or 6.6% over the period when inventory typically builds ahead of peak demand in the fourth and first quarters. Days of forward supply are at 31.8, a four-month low.

Distillates are strengthening on expectations for increased use as a heating fuel amid natural gas shortages in Europe and tight supply in Asia. Emblematic of these worries are spiking electricity prices in the United Kingdom, where a lack of wind power and the loss of a key interconnector have heightened demand for gas. NYMEX October natural gas futures rallied 17.1 cents to $4.976 MMBtu Thursday, easing from last week's $5.65 -- a 7 1/2-year spot high.

October RBOB futures jumped 4.76 cents to $2.1715 gallon, pulled higher by the gains in crude. EIA reported a 3.474 million bbl build in gasoline stocks for last week, as five refineries in Louisiana shut by Hurricane Ida late last month returned to normal operations.

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

Brian Milne