DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange retreated on Friday pressured by a rebounding U.S. dollar, while all petroleum contracts registered weekly gains amid an improving inflation outlook in the United States and supply disruption in Libya, a major oil producer in northern Africa, where violent protests shut down three of the country's largest oil fields.

Investors continue to monitor an evolving situation in Libya amid a sudden escalation of conflict between tribal forces in Benghazi and the United Nations-backed government in Tripoli. Protestors in the southern regions of Libya began shutting down major oil fields on Thursday after an arrest of a former finance minister, Faraj Bumatari, by government forces.

"We affirm the continuation of the oil closures, and we may escalate the situation to more than that if our son, Faraj Bumatari, is not released," stated protesters in a released video on social media.

The government in Tripoli is yet to comment on the developing situation. As of Friday afternoon, El Feel, Sharara and Waha oil fields remain closed with a combined production of more than 500,000 bpd or 0.5% of global oil supplies currently offline. Before the disruption, Waha and Sharara oil fields produced roughly similar amounts of oil, averaging between 250,000 and 290,000 barrels daily.

Most of the oil produced at these two fields has been exported to southwestern Europe, including Spain, Italy, and France.

The disruption in Libya comes as major forecasting agencies, including the International Energy Agency and Organization of the Petroleum Exporting Countries, said the global oil market is likely to fall into deeper deficit in the second half of the year. A combination of fewer supplies available from Russia and Saudi Arabia, two of the world's largest oil producers, along with demand gains in the United States and China will result in a 2 million bpd global shortfall between production and demand during the fourth quarter.

OPEC in its Monthly Oil Market Report estimated Russian oil production will drop by a staggering 1.28 million bpd from the second quarter to 9.55 million bpd for the third quarter. That would be 750,000 bpd below the 2022 output rate. Meanwhile, Saudi Arabia said it would cut oil production to a multidecade low 9 million bpd in July and August as a unilateral 1 million bpd production cut takes effect.

Underlying gains in the oil complex this week is an improving inflation outlook in the United States where the labor market along with consumer prices showed signs of easing. The U.S. Producer Price Index, which measures inflation at the wholesale level, offered fresh evidence on Thursday that inflation is easing across the U.S. economy. PPI last month rose at the slowest pace since August 2020, gaining a mere 0.1% in the 12 months ending in June. Figures for May were also revised lower to show the index falling to a negative 0.4% instead of the previously reported 0.3%.

PPI, which measures price changes for produced goods at the factory gate, is an early indicator of inflation at the consumer level.

Offering further evidence of retreating inflation, the U.S. consumer sentiment index jumped this month to the highest level in nearly three years, according to the bimonthly report released Friday morning by the University of Michigan. All components of the index increased considerably, led by a 19% surge in long-term business conditions and 16% increase in short-run business conditions.

"Overall, sentiment climbed for all demographic groups except for lower-income consumers. The sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets," said Surveys of Consumers Director Joanne Hsu.

Following the data's release, the U.S. dollar index firmed 0.15% against a basket of foreign currencies to 99.605. Front-month West Texas Intermediate on NYMEX fell $1.47 to $75.42 bbl, and ICE September Brent contract fell $1.49 to $79.87 bbl. NYMEX August RBOB futures declined $0.0349 to $2.6437 gallon, and August ULSD futures eased to $2.5979 gallon, down $0.0125 on the session.

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