DTN Oil

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange settled Wednesday's session below $80 bbl after federal data reported domestic oil production climbed to the highest level in three years last week, offsetting some of the output cuts introduced by the OPEC+ coalition, while a stronger U.S. dollar tied to prospects for tighter monetary policy from the Federal Reserve further pressured the oil complex.

The greenback settled above 103 at a 103.319 nine-week high on Wednesday, gaining 0.22% against a basket of foreign currencies after minutes from the Federal Open Market Committee's July 25-26 meeting revealed most officials with the central bank remained biased towards more rate hikes this year. At that meeting, FOMC raised the benchmark borrowing rate for the 11th time in 17 months to a 5.25% by 5.5% range.

"Participants stressed that inflation remained unacceptably high, and that further evidence would be required for them to be confident that inflation was clearly on a path toward the Committee's 2% objective," cites minutes from the meeting, further noting that "consumer spending had exhibited considerable resilience, underpinned by, in aggregate, strong household balance sheets, robust job and income gains, a low unemployment rate, and rising consumer confidence."

Indeed, retail sales for July jumped to 0.7% -- the biggest increase since January, despite Fed efforts to cool consumer spending, and industrial production accelerated to 1% following declines in the previous months. Manufacturing output rose 0.5% in July, led by production of autos and parts, up 5.2% from the previous month, and the index for utilities climbed 5.4% driven by demand for air conditioning amid extremely high temperatures. Increased manufacturing activity bodes well for distillate fuel consumption as consumer demand gradually evens out the post-pandemic rotation from manufacturing to services.

Wednesday's inventory report from the U.S. Energy Information Administration showed domestic distillate inventory didn't move much from its multiweek low 115.743 million bbl, which is 16.4% below the seasonal five-year average. Gasoline stockpiles eroded further to 216.2 million bbl, some 7% below the five-year average. Demand for gasoline, meanwhile, dropped 451,000 bpd to 8.851 million bpd, bringing the four-week average to 0.9% below last year's consumption rate.

Further details of the report revealed, U.S. oil producers raised output by 100,000 bpd in the week-ended Aug. 11 to 12.7 million bpd, just 400,000 bpd shy of the all-time high reached in March 2020 before the COVID-19 pandemic forced a large number of wells to shut-in. On an annualized basis, U.S. oil production is forecast to break through pre-COVID records to average 12.8 million bpd this year and 13.1 million bpd in 2014. Despite surging oil production, U.S. commercial oil inventories still dropped by a larger-than-estimated 6 million bbl last week to 439.7 million bbl and are now 1% below the five-year average, according to EIA data. Domestic refiners raised run rates by 0.9% in the reviewed week to 94.7% of capacity compared with expectations for a 0.3% gain in utilization.

Earlier in the session, the oil complex came under mild selling pressure after China's non-bank lender, Zhongshan International Trust, reportedly missed payments on its investment products to three separate companies in what could be a sign of contagion from a deepening property crisis. Oil traders closely monitor developments around China's property crisis and potential signs of a spillover into the broader economy with Beijing being one of the largest buyers of crude oil in the physical market. OPEC in its Monthly Oil Market Report estimated China's crude imports fell to a six-month low 10.3 million bpd in July from a near record-high 12.7 million bpd seen in the prior month.

At settlement, WTI September futures on NYMEX declined $1.61 to $79.38 bbl, and ICE Brent for October delivery dropped back $1.44 to $83.45 bbl. NYMEX RBOB September futures gained $0.0195 to $2.8671 gallon, and front-month ULSD futures edged lower to settle at $3.0209 gallon, down $0.0071.

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