Oil Caps Best Week This Year on Signs of More Balanced Market

  • Inventories in the U.S. shrink as fuel demand surges
  • Russia’s Novak sees faster rebalancing in second half

BofAML's Blanch Sees a Range-Bound Oil Market

Oil had its best week this year as signs point to a market that’s achieving a balance between supply and demand.

Futures surged 8.6 percent in New York for the biggest weekly gain since December. U.S. crude stockpiles fell to the lowest since January, while gasoline inventories shrank to the smallest this year. The nation’s fuel use in June surged to the highest for that month in a decade, according to the American Petroleum Institute. Russia Energy Minister Alexander Novak said he sees the oil market rebalancing more quickly in the second half of the year.

Oil prices in New York are inching closer to $50 a barrel, while futures in London surpassed that level earlier this week. Concerns are abating that efforts by the Organization of Petroleum Exporting Countries and its allies to curb output will be offset by rising production elsewhere. Kuwait joined the United Arab Emirates in promising to pump less after Saudi Arabia called on OPEC producers to improve compliance with their pledged cuts. Shale drillers added just two oil rigs this week, Baker Hughes Inc. data showed Friday.

“You’ve got tightness. You had some big storage draws here in the United States,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by telephone. “There’s less crude oil. That’s all there is to it.”

West Texas Intermediate crude for September delivery rose 67 cents to settle at $49.71 a barrel on the New York Mercantile Exchange. Total volume traded was about 21 percent above the 100-day average. The U.S. benchmark closed above its 200-day moving average for the first time since May.

Brent for September settlement added $1.03 to end the session at $52.52 a barrel on the London-based ICE Futures Europe exchange, up 9.3 percent for the week. The global benchmark crude, which also rose above its 200-day moving average, traded at a premium of $2.81 to WTI.

Tighter Market

Brent futures for the nearest delivery traded at a premium of 30 cents to those for the following month, the largest premium since April 2016. This pattern, known as backwardation, typically signals tighter supplies, while the opposite contango structure signals a glut.

“When it gets close to going from contango to backwardation, that is all you need to know about the spreads. If they go from one to the other, you are going from an excess to a shortage,” Yawger said.

Total deliveries of petroleum products, a measure of demand, climbed to 20.3 million barrels a day in June, according to the API. Demand for distillate fuel and jet fuel rose, while gasoline consumption fell. U.S. gasoline inventories fell for a sixth week to the lowest level since Dec. 23 last week, Energy Information Administration data showed.

“In a big way, we’re having a switch of market expectations from one that thinks these inventory problems are going to persist forever and ever to a situation where increasingly markets are starting to believe in this whole rebalancing, particularly in the United States,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, said by telephone.

Oil-market news:

  • Further deterioration of Venezuelan production is most bullish for Canadian and Mexican heavy barrels RBC Capital Markets LLC analysts said in a note.
  • Libya’s crude production will average 1.03 million barrels a day next year, up from a previous forecast of 843,000 barrels a day, said Fitch Group’s BMI Research.
  • Eni SpA joined its oil-industry peers in posting a better-than-expected performance due to cost reductions, rising output and higher cash flow.

— With assistance by Serene Cheong, Ann Koh, Stephen Stapczynski, and Grant Smith

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