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ICE September Brent settles $5.46 lower at $73.40/b on US, China trade war worries

Highlights

New tariffs on China bearish

Libya lifts force majeure

Cushing draws tighten WTI/Brent spread

New York — Crude futures tumbled Wednesday, with concerns of an escalated trade war between the US and China outweighing a 12.6 million-barrel draw in US crude inventories.

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ICE September Brent settled $5.46 lower at $73.40/b, while NYMEX August crude settled $3.73/b lower at $70.38/b.

In refined products, August NYMEX heating oil fell 12.10 cents to settle at $2.1008/gal, and August RBOB settled 9.89 cents lower at $2.0614/gal.

Crude longs were less focused on the US crude stock draw, and more focused on news that US President Donald Trump said the administration was moving forward with new tariffs on $200 billion of Chinese imports. This renewed trade war jitters, causing the equities to tumble. Following the NYMEX close, the Dow Jones Industrial Average was down 183 points at 24,736, coming off an intra-day low of 24,671.

Any slowdown in economic growth would be bearish for refined products, and thus crude, demand. OPEC Wednesday said global demand should grow 1.45 million b/d to 100.30 million b/d in 2019, but cautioned that trade disputes could have a chilling effect on the economy.

Also bearish was news that Libya lifted its force majeure on the Ras-Lanuf, Es Sider, Marsa, El Hariga and Zueitina oil terminals, National Oil Corporation chairman Mustafa Sanalla said. NOC had declared force majeure on some ports on June 14 and on July 1 for others.

Late last week, NOC said production had fallen to 527,000 b/d from over 1 million b/d June 13.

News Tuesday that the US was working with Saudi Arabia and other producers to secure crude supply ahead of renewed sanctions on Iran was also keeping the crude bulls in check.

The sanctions are expected by some analysts to remove 1 million b/d off the market.

Saudi Arabia pumped 10.49 million b/d of crude in June, up 460,000 b/d from May, OPEC said Wednesday.

While some of that increase may be going into local direct burn for power generation, Saudi exports have risen. Exports averaged 7.6 million b/d in June, up from under 7 million b/d earlier in the year, according to an S&P Global Platts analysis of tanker movements.

US CRUDE SURPLUS TIGHTENS

While the inventory draw reported by the US Energy Information Administration exceeded analyst expectations, it followed a surprise build of 1.25 million barrels the prior week, softening the bullish impact, said Price Futures Group analyst Phil Flynn Wednesday.

The report gave the market "two weeks of draws at the same time," Flynn said.

Analysts polled by S&P Global Platts were looking for inventories to fall by 4.8 million barrels, driven largely by strong refinery runs.

Last week's crude draw put US crude inventories at 405.25 million barrels, down 90 million barrels year on year. And the seasonal trend for US crude inventories remains in place, with draws likely to continue through August.

US crude stocks were 4% below the five-year average the week ending July 6, down from a 26% surplus the same week last year, the EIA data showed.

US crude production has risen, but refiners are operating close to capacity. Refinery inputs remained high at 17.65 million b/d last week, or 96.7% of capacity, helping to drain the crude surplus.

Also, US crude imports fell 1.62 million b/d to 7.43 million b/d last week, with the bulk of that decline in the US Gulf Coast.

It should come as no surprise that the bulk of the US crude stock draw -- 7.24 million barrels -- was in the US Gulf Coast.

Rising US crude exports have also helped to tighten supplies. While US crude exports slipped 309,000 b/d to 2.03 million b/d the week ending July 6, exports have been rising steadily this year.

On a four-week moving average exports at 2.43 million b/d were up from 683,000 b/d the same time last year.

Crude stocks at the NYMEX crude delivery point of Cushing, Oklahoma fell 2.06 million barrels last week to 25.72 million barrels, the EIA data showed. Cushing stocks have tightened from 37.22 million barrels the week ending May 11 on high refinery runs and the 350,000 b/d Syncrude production outage in Canada.

Shrinking Cushing inventories have narrowed the WTI discount to Brent. September WTI ended Wednesday at a $4.78/b discount to Brent, tightening from an $11/b discount in early June.

That tighter discount could eat into US crude export economics, although the spread is wider out along the curve, with December WTI ending Wednesday at $7.67/b under Brent.

REFINED PRODUCTS DEMAND STRONG

In refined products, US gasoline stocks fell 694,000 barrels to 239 million barrels, while distillate stocks climbed 4.13 million barrels to 121.68 million barrels.

Demand for refined products exports remains strong. Recent jobs data and GDP estimates for the US have been supportive for both driving demand, and industrial demand for diesel fuels.

External demand has also been steady. The EIA reported total product exports at 5.38 million b/d on a four-week average, rising from 4.81 million b/d at the end of May.

The distillate stock build would have likely been even more bearish had the bulk of it been seen in the US Atlantic Coast, home of the New York delivery point for the NYMEX ULSD contract.

USAC stocks were roughly unchanged at 33.845 million barrels last week, the EIA data showed, leaving inventories tight at 30.6% below the five-year average.

The bulk of the stock build was in the Midwest, where combined low and ultra low sulfur diesel stocks at 31.24 million barrels were up 2.6 million barrels on the week, putting inventories at a 4% surplus to the five-year average.

--Jeff Mower, jeff.mower@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com