Oil Futures Slip on Profit-Taking

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled lower Thursday, declining after a two-day rally as traders booked profits from the run-up while equities took a nosedive on fear over the potential for a global trade war following news the United States is set to slap tariffs on China.

NYMEX West Texas Intermediate and ULSD futures reversed off seven-week highs on their spot continuous charts of $65.74 and $2.0156, respectively, posted overnight, and the RBOB contract from a $2.0227 nearly seventh-month spot high. Brent crude consolidated at the upper end of Wednesday's trade range, which included a $69.86 seven-week spot high, stopped by resistance at $70.00 per barrel (bbl).

While down, oil futures remain underpinned by support over global supply security concerns, which have heightened in March, along with strong oil demand in the United States and globally.

A projection by the Joint Ministerial Monitoring Committee overseeing compliance with a production agreement by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries led by Russia that the global oil market would rebalance in either the second or third quarters has also boosted bullish sentiment this week. After meeting over the past weekend, the committee praised compliance by the OPEC-non-OPEC coalition with their two-year agreement cutting production by 1.8 million bpd from October 2016 output levels, which was well above 100%. They see the strong compliance leading to a quicker market rebalancing than previously thought. The International Energy Agency in their monthly Oil Market Report released last week said, "market re-balancing is clearly moving ahead," but set the timeline at the end of 2018 or early 2019.

Supply data from the United States lends support for a market rebalance this year. The Energy Information Administration reports total commercial inventory of crude and oil products drawn down 6.9 million bbl to a nearly three-year low at 1.1911 billion bbl during the week-ended March 16, while 17.738 million bbl above the five-year average. The five-year average trends higher through the end of the third quarter while this year's trend is down.

In addition to the OPEC-non-OPEC production cuts, a key component in reducing excess global supply has been strong demand led in large part by the United States. Total U.S. oil product demand at 20.6 million barrels per day (bpd) this year through March 16 is 1.010 million bpd, or 5.2%, above the comparable year-ago average.

These factors counter record high U.S. crude production, which is up 915,000 bpd, or 9.6%, since the first week of January to 10.407 million bpd, and on pace to average 10.7 million bpd this year, projects the EIA. Should demand fall off, however, oil supply would quickly rebuild.

Other factors underlying a bullish market sentiment, as well as compliance by OPEC in meeting their reduced production quota is trouble in Venezuela. The OPEC member is in financial collapse, with another round of sanctions by the United States this month further pressuring its oil industry and economy. Ineptness in managing its state oil company, PDVSA, over the years has triggered a rapid decline in its oil production. After crude oil production averaged 2.375 million bpd in 2015, Venezuelan crude output ended 2017 at 1.745 million bpd, and averaged 1.548 million bpd in February, according to secondary sources cited in the latest OPEC Monthly Oil Market Report.

Iranian crude oil production could also decline sharply should U.S. President Donald Trump decertify the nuclear accord reached in 2015 by his predecessor and Europe, which would re-impose sanctions on Iran. Iranian crude oil production at 3.8 million bpd could drop to 3.2 million bpd.

NYMEX May WTI futures settled down 87 cents at $64.30 bbl, with the May Brent contract on ICE ending at a $68.91 bbl settlement, down 56 cents. Brent's premium to WTI widened to a $4.61 bbl two-month high at settlement, reflecting growing U.S. production. The WTI discount provides an incentive for U.S. crude exports, which have averaged 1.463 million bpd year to date, which compares with 977,673 bpd averaged in 2017.

NYMEX April ULSD futures settled down 1.14 cents at $1.9923 per gallon, while the April RBOB futures settled above $2.00 per gallon for the second straight session and only third time since July 2015, ending down 26 points at $2.0096 gallon.

A global trade war could upend projections for strong demand. After announcing tariffs of 25% on imported steel and 10% on imported aluminum last month, which take effect Friday, March 23, the Trump administration on Thursday announced plans to slap tariffs on China totaling about $60 billion.

In reaction, the Dow Jones Industrial Average plunged nearly 700 points this afternoon while the S&P 500 Index dropped nearly 40 points. The U.S. dollar, which has an inverse relationship with WTI futures, was flat near a five-week low following the Federal Reserve's decision Wednesday afternoon to boost the federal funds rate 25 points to a 1.75% 10-year high.

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

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