Crude Futures Pause Upside Push as Eurozone Economy Slows

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

CRANBURY, N.J. (DTN) -- West Texas Intermediate futures nearest delivery on the New York Mercantile Exchange and the front-month Brent contract on the Intercontinental Exchange pulled back in early trading Thursday after a string of advances following missed readings on a pair of Eurozone economic indicators released overnight, and ULSD and RBOB futures were mixed, reflecting inventory data published late Wednesday afternoon.

In its final reading of second quarter economic activity for the Eurozone, Eurostat reported gross domestic product edged up 0.1% compared with expectations for a 0.3% uptick. Germany's Federal Statistical Office showed industrial production in Eurozone's largest economy declined 0.8% in July that, while an improvement from June's revised 1.4% decrease, missed expectations for a 0.2% decline. Year-on-year, German industrial production fell 2.2% in July, highlighting the struggles for the country's prized industry sector following lost low-cost natural gas deliveries from Russia amid the Ukraine war.

The overnight data comes ahead of delayed weekly statistics from the Energy Information Administration due out at 11 a.m. EDT and follows a bullish report from the American Petroleum Institute released Wednesday afternoon showing big draws in commercial crude and gasoline inventory during the week leading up to the Labor Day weekend.

API reported commercial crude inventory was drawn down 5.521 million barrels (bbl) during the week ended Sept. 1 compared with market expectations for a 2.1-million-bbl draw. Gasoline stockpiles sank 5.09 million bbl last week, according to API, well above market estimates for a 1.2-million-bbl draw, with distillate inventory building by 310,000 bbl that was contrary to a consensus call for a 200,000 bbl decrease.

Stocks at Oklahoma's Cushing tank farm accounted for 1.35 million bbl of the national draw from commercial crude inventory. EIA last showed Cushing crude inventory at a nearly nine-month low of 29.165 million bbl on Aug. 25, with working inventory at 37.3% of capacity. Falling stocks at the key hub, which serves as the underlying delivery location for the NYMEX WTI futures contract, joined by Saudi Arabia's ongoing 1-million-barrels-per-day (bpd) reduction in crude production, have widened WTI's calendar spreads. The six-month calendar spread reached a 10-month high $4.82 bbl on Wednesday.

The supply restraint by the Saudis, joined this week by Russia's intentions to hold back oil exports by 300,000 bpd through year's end, will continue to tighten the global oil disposition by keeping supply in a deficit against demand. Outside an unraveling of current consumption patterns, the supply cuts will lead to continued global drawdowns through the fourth quarter that bolster oil prices.

In early trading, NYMEX October WTI futures were down $0.59 at $86.95 bbl, holding below this week's $88.07-$88.08 double top following nine session advances. ICE November Brent futures were down $0.55 at $90.05 bbl, although now trading above $90 bbl for the third straight session. NYMEX October ULSD futures eased for a second session in early activity, down $0.025 to $3.1677 gallon, with the October RBOB contract up $0.01 at $2.6112 gallon.

On Wednesday, the Institute of Supply Management released its index for the U.S. services sector, which surged from 52.7 in July to 54.5 in August, surpassing market expectations for a modest decline to 52.5. The late-summer resurgence in services, no doubt benefiting from a strong labor market, bolsters economic growth that underpins gains for oil products. The Atlanta Federal Reserve Bank's GDPNow indicator forecasts the U.S. economy in the third quarter to expand at a 5.6% annualized rate, accelerating from the second quarter's 2.1% growth rate.

Robust demand for services ties together with greater crude costs that lead to elevated gasoline prices paid by consumers, with the combination again heightening concern over inflation and more rate hikes. Ahead of the Federal Open Market Committee's Sept. 19-20 meeting on monetary policy, CME Group's FedWatch Tool shows investors still overwhelmingly expect central bank officials to maintain the federal funds rate at a 5.25% by 5.5% target range. Looking out to FOMC's November and December meetings, however, the probability for a 25-point hike in the key overnight bank borrowing rate hovers near 41% compared with no change at about 56%.

The U.S. Dollar Index strengthened 0.09% to 104.920 against a basket of foreign currencies early Thursday, holding below Wednesday's 105.015 six-month high reached in intraday trading. U.S. dollar gains are a drag on WTI futures prices.

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

Brian Milne