Oil Futures Advance on Falling Crude Stocks, Risk-On Trade

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

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rose Friday afternoon, posting gains for a third consecutive week as production outages in the offshore Gulf of Mexico, Kazakhstan and Libya have forced energy companies to pull large volumes of crude from inventories.

Some members of the Organization of the Petroleum Exporting Countries and their allies, known as OPEC+, have struggled to raise output due to underinvestment or maintenance delays during the pandemic, according to analysts. Kazakhstan's biggest oil producer, Chevron-led Tengizchevroil, said Friday it would delay its $45.2 billion expansion project by three to seven months at Tengiz, due to pandemic restrictions and COVID-19 infections among workers. Tengizchevroil, in which Exxon Mobil, Russia's Lukoil and Kazakh state firm KazMunayGaz also have stakes, accounts for almost a third of the Central Asian nation's total oil output.

Russia's Gazprom has been reducing its gas supplies to Europe where prices have soared in recent weeks, due to reported maintenance issues, while the company is being accused of doing too little to increase its natural gas supplies to Europe.

Domestically, crude inventories remain tight in the wake of Hurricane Ida as operators in the Gulf of Mexico struggle to return to full production. Around 294,214 barrels per day (bpd) or 16.18% of total Gulf production remained shut-in as of Sept. 23, according to the Bureau of Safety and Environmental Enforcement. Despite the proportion of offline production easing from a week earlier, full recovery is seen delayed until early 2022 due to damaged infrastructure in Gulf waters.

Limiting further gains in oil futures was a stronger U.S. Dollar Index, with U.S. dollar regaining upward momentum on Friday to settle at 93.335 after pressured Thursday by U.S. manufacturing data for September that missed market expectations and unemployment claims which unexpectedly rose last week. U.S. Labor Department said Thursday initial unemployment claims, a proxy for layoffs, rose 16,000 to 351,000 last week from an upwardly revised 335,000 the prior week.

While giving a speech at "Fed Listens" virtual roundtable today, U.S. Federal Reserve Chairman Jerome Powell said, "The economy [has] never seen these kinds of supply-chain issues, never seen an economy that combines drastic labor shortages with lots of unemployed people. ... So, it's a very fast changing economy. It's going to be quite different from the one (before)."

The increase in COVID-19 cases over the past two months has weighed on consumer sentiment and could have contributed to a hiring slowdown in August, particularly in the leisure and hospitality industry. However, the initial claims numbers suggest firms haven't reacted by laying off workers broadly.

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. Some of the slowdown in manufacturing reflects the rotation in spending back to services from goods because of COVID-19 vaccinations. Manufacturing, which accounts for 11.9% of the U.S. economy, remains underpinned by businesses desperate to replenish stocks after inventories were drawn down sharply in the first half of the year.

On the session, NYMEX November West Texas Intermediate futures advanced $0.68 to finish at $73.98 barrel (bbl), and ICE November Brent futures settled at a 35-month high on the spot continuous chart at $78.09 bbl. NYMEX October ULSD futures moved higher 1.8 cents to settle at a $2.2671 gallon 35-month spot high and front-month RBOB futures gained 1.6 cents to a $2.1875 gallon settlement.

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

Brian Milne