Oil Futures Fade Following Rally Amid Demand Headwinds

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 were shallowly mixed early Thursday following midweek rallies spurred by announced production cuts at the Organization of the Petroleum Exporting Countries' 8th International Seminar in Vienna, with continued concern over slowing global economic growth holding back oil demand and prompting a pause in buying.

The oil market is contending with competing themes, as production cuts by OPEC+ highlighted by additional output curbs by Saudi Arabia that look to drawdown global inventories are countered by economic headwinds, namely in China where a much-trumpeted post-lockdown recovery has faltered.

Weekly data released late Wednesday by the American Petroleum Institute offered a reminder of demand concerns, with the Washington, D.C.-based industry trade organization reporting a 2.219-million-barrel (bbl) build in combined U.S. gasoline and distillate inventory in closing out the final week of the first half of the year, with 1.615 million bbl of the stock gain gasoline.

Considering the United States is in the peak demand season for driving, the stock build suggests gasoline consumption has failed to return to pre-COVID levels. Indeed, while implied gasoline demand during the four weeks ended June 23 was up 3.8% against the comparable year-ago period, according to Energy Information Administration data, its 4.4% below the same four weeks in 2019. Improving vehicle efficiencies and increased sales of electric vehicles are part of the reason for lower gasoline demand, while the work-from-home environment has sapped demand for work commutes.

Demand for diesel fuel also remains under pressure amid a recession in U.S. manufacturing, and slowdown in home building earlier in the year. Diesel demand, which was flat against year-ago at 3.67 million barrels per day (bpd) during the four weeks ended June 23, is 5.2% below the 2022 consumption pace cumulatively this year, EIA data shows. Diesel demand is finding support from a recent surge in home-building activity beginning in May amid low inventory and pent-up demand. A potential strike by Teamsters at UPS as early as Aug. 1 following the collapse of contract talks this week would have a deleterious effect on supply chains and demand for the middle distillate.

API also reported a large 4.382-million-bbl drawdown in commercial crude oil stocks for the final week of June even as stocks at the Cushing tank farm in Oklahoma, the underlying delivery location for NYMEX West Texas Intermediate futures, gained 289,000 bbl. EIA, which will release its data set for the final week of June at 11 a.m. EDT, delayed a day by this week's Independence Day holiday, reported a massive 9.603-million-bbl crude stock draw for the week ended June 23. Driving the crude inventory drawdowns are exports, with U.S. crude increasingly competing internationally.

EIA in its most recent Short-term Energy Outlook forecast world oil consumption for the third quarter at 101.6 million bpd, more than world production for the quarter, which it projects at 101.4 million bpd, for the first time since the second quarter 2022. For the fourth quarter, EIA shows global oil production and consumption at parity at 101.69 million bpd.

EIA might adjust the production side of their outlook on July 11 with their next monthly STEO following this week's announcement by OPEC that Saudi Arabia extended a unilateral 1 million bpd production cut in July into August. Russia also said this week it would cut 500,000 bpd of oil exports, and Algeria said it would throttle output by 20,000 bpd next month.

Against these efforts are rising production by OPEC member Iran that does not participate in OPEC+ output quotas because of U.S. sanctions. During the first five months of 2023, Iranian crude oil production increased by 100,000 bpd to 2.679 million bpd, with output gains said to have continued in June. Moreover, Iran is reported to have increased exports at a greater pace than production gains, turning to stored oil after a crackdown on Iranian exports under the Trump administration eased under the Biden administration.

Nearing 8 a.m. EDT, NYMEX August WTI futures were up about $0.20 at $72 bbl following a $2 rally on Wednesday, while ICE September Brent gained fractionally to $76.75 bbl following a $2 advance over the two preceding sessions. NYMEX August RBOB futures were flat at $2.5185 gallon, and the August ULSD contract eased 50 points to $2.4883 gallon.

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

Brian Milne