DTN Oil

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange (NYMEX) and Brent crude on the Intercontinental Exchange ended the second to last trading session of 2023 with steep losses, with the February Brent contract expiring at a 10-day low as more shipping companies plan to use the Suez Canal-Red Sea transit route despite the threat of Houthi terrorists off the southern Yemen coast.

While the situation remains fluid, shipping lines are providing a vote of confidence that a maritime coalition will help counter the threat of drone and missile attacks or outright piracy by Iranian-backed Houthi militia in the region. Reports suggest some shipping lines are using their Automatic Identification Systems to indicate their vessels have armed security on board, or that they are not carrying goods to or from Israel. Shipping lines that continue to avoid the Red Sea need to reroute Europe-to-Asia shipping around the Cape of Good Hope that adds to voyage times and shipping costs.

The Houthis, which fought Saudi Arabia forces for nearly nine years amid civil war in Yemen, said their attacks are in support of Hamas, another Iranian-funded terrorist group now at war with Israel in the Gaza Strip. Israel declared war with Hamas following the terrorist group's barbaric attack on Israeli citizens on Oct. 7.

The U.S. Navy heads a 10-country maritime coalition announced Dec. 19 called Operation Prosperity Guardian that will provide security for commercial vessels moving through the dangerous waterway. India, which is not part of the coalition, said it has deployed four destroyers to counter piracy and drone attacks on commercial vessels.

The two-day selloff in oil futures is in response to reduced shipping costs and quicker delivery times. The Suez Canal is the shortest shipping route between Europe and Asia, with about 12% of global shipping moving through the waterway. Rerouting voyages from the Suez Canal to around the Cape of Good Hope adds 3,500 nautical miles and more than a week to the journey.

The readjustment in shipping overrode bullish supply statistics from the Energy Information Administration (EIA) released late morning, with EIA reporting a 6.9 million barrels (bbl) draw from U.S. commercial crude stocks during the week-ended Dec. 22 that was well above a 2.4 million bbl market consensus. The EIA data was also in contrast to a late Wednesday report from the American Petroleum Institute showing a 1.837 million bbl weekly build. The draw pressed commercial crude inventory to a 436.568 million bbl seven-week low, and widened the deficit against the five-year average to 7.682 million bbl.

EIA reported total oil stocks in the United States excluding strategic reserves dropped by a steep 17.784 million bbl or 1.4% to a 1.244 billion bbl seven-month low during the week-ended Dec. 22, although 6.1 million bbl of draw was in other oils. Nonetheless, product supplied to the U.S. market increased 630,000 bpd, or 3%, to a 21.415 million bpd seven-week high, with gasoline supplied to the U.S. market up a sharp 414,000 barrels per day (bpd) or 4.7% to 9.168 million bpd during the week reviewed, a seven-week high, and distillate fuel supplied to the U.S. market increased 154,000 bpd or 4% to a 3.977 million bpd five-week high.

Closer examination of the weekly data set does show bearish components however, including a second week of record high U.S. crude production at 13.3 million bpd.

Also, the decline in crude stocks was limited to PADDs 3 and 5, while inventory at the Cushing tank farm in Oklahoma, the underlying delivery location for West Texas Intermediate futures, increased for the 10th consecutive week through Dec. 22, up 1.508 million bbl, or 4.7%, to a 33.973 million bbl 20-week high. PADD 3 crude stocks were drawn down 11 million bbl to 237.7 million bbl while falling 1 million bbl to 48.5 million bbl in PADD 5.

The PADD 3 crude stock decline was realized despite reduced crude throughputs at district refineries, which fell 76,000 bpd to 8.89 million bpd. U.S. crude exports, which flow from PADD 3, also declined, down 206,000 bpd to 3.915 million bpd. The weekly data could be skewed but does come ahead of end year's ad valorum taxes in Texas, an incentive to draw down inventory, or to park stocks at Cushing.

The decline in WTI futures outpaced the fall in Brent futures, with the U.S. crude benchmark also coming under pressure from a stronger U.S. dollar. The U.S. dollar strengthened 0.3% to 100.913 against a basket of foreign currencies in index trading after weakening to a five-month low 100.320 early in the session.

NYMEX February WTI futures settled down $2.34 at $71.77 bbl, a steep retreat from Tuesday's $76.18 four-week high.

ICE February Brent futures expired down $1.26 at $78.39 bbl, shedding 4.1% in value from this week's $81.72 four-week high. March Brent settled Thursday's session $2.39 lower at $77.15 bbl.

NYMEX January RBOB futures ended down $0.0698 at a $2.0852 gallon two-week low ahead of expiration Friday afternoon, with the February contract settling at a $0.0145 premium to the expiring contract. NYMEX January ULSD futures settled $0.0676 lower at $2.5563 gallon, also a two-week low, while holding a $0.0160 premium to February delivery.

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