Oil Futures Lower on Slowing Demand ahead of Expirations

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

CRANBURY, N.J. (DTN) -- For the final session of the second quarter, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange were lower for a second day early Thursday amid slowing fuel demand in the United States while OPEC+ is expected to agree to a 648,000 barrels per day (bpd) increase in crude oil production for August.

Meeting by way of videoconference this morning, OPEC+ is set to return all of the production it cut in the second quarter 2020 in response to lost demand during COVID-19 pandemic lockdowns. While the large increase in output by the producer group is bearish, OPEC+ is estimated to be underproducing its quota by 2.8 million bpd. Today's expected agreement to further lift output is seen widening the deficit amid a lack of spare capacity.

Earlier this week during the Group of Seven meeting in Germany, French President Emmanuel Macron was overheard telling U.S. President Joe Biden United Arab Emirates had no additional spare capacity and that Saudi Arabia could only lift output by 150,000 bpd over the next six months, underpinning August Brent crude's push above $120 bbl on Wednesday.

UAE oil minister Suhail Al Mazrouei was quick to note UAE would meet its quota, which will be 3.17 million bpd should OPEC+ agree to the August production hike. UAE produced 3.046 million bpd in May according to OPEC, citing secondary sources. UAE's production quota for July is 3.127 million bpd.

Saudi Arabia's July production quota is 10.833 million bpd, with an agreement by OPEC+ today to lift the kingdom's quota to 11 million bpd, a production rate the Saudi's have only reached twice -- in November 2018 and April 2020. In May, Saudi oil production was estimated by secondary sources at 10.424 million bpd, although the Saudis self-reported an output rate of 10.538 million bpd.

Saudi Arabia previously said their production capacity was above 12 million bpd and UAE said they could produce 4 million bpd. Amid the tight oil market, Western nations led by the United States are pushing for Saudi Arabia and UAE to lift output well above OPEC+ quotas to offset sanctioned Russian oil, leading to analysts questioning if the two countries actually have the spare capacity. On Wednesday, the OPEC+ Joint Technical Committee released a document that said the global oil market surplus is likely to narrow to 1 million bpd by the end of the year from their previous estimate of 1.4 million bpd.

Offsetting narrowing spare capacity is weakening fuel demand, with data released Wednesday by the Energy Information Administration showing building inventory of gasoline and distillate fuels for the week ending June 24 while implied demand for distillate fuels tumbled to an 11-week low at 3.568 million bpd.

Easing demand for distillate fuels coincides with slowing economic growth, with Atlanta Federal Reserve Bank's GDPNow tracker showing second quarter U.S. economic growth at a modest 0.3% following a 1.6% contraction during the first quarter reported Wednesday by the Bureau of Economic Analysis. Other regional Federal Reserve Banks, including Kansas City and Dallas, have found manufacturing activity in their regions slowing sharply.

EIA shows days of forward supply for distillate fuels increased to 30.6 as of June 24, a more than five-month high. Gasoline days of forward supply increased for a second week to a five-week high 24.8 days ahead of the July 4th holiday, when AAA has forecasted record road travel of 42 million.

NYMEX July RBOB futures are down more than 12.5cts to $3.7015 gallon ahead of expiration this afternoon, with the August contract trading at a roughly 9cts discount to the expiring contract. NYMEX July ULSD futures are about 2cts lower near $4.0165 gallon, with the August contract about 7cts below July delivery.

NYMEX August West Texas Intermediate futures were $1.30 lower at $108.50 bbl. ICE August Brent crude is down $0.75 near $115.50 ahead of expiration later today, with the September contract trading at a roughly $3 discount.

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

Liubov Georges