Oil Futures End Higher, Spike on Week

CRANBURY, N.J. (DTN) -- Oil futures traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange posted modest gains Friday after choppy trading, and spiked on the week after tensions in the Middle East escalated sharply, while a world energy monitor sees protracted global oil inventory surplus erased as soon as May.

A series of developments have whipsawed oil futures values early in the second quarter, with last week's concern over demand amid a trade dispute between the United States and China giving way this week to a threat to the security of oil supply in the prolific Middle East, where an attack with outlawed chemical weapons is expected to draw a military response from the United States, France and Great Britain.

Short-covering ahead of the weekend was expected after news emerged that the United States, France and Great Britain agreed on an outline for a military attack on Syria in response to an April 7 chemical weapons attack near Damascus on a rebel position that killed women and children. Forces loyal to Syrian President Bashar Assad are blamed for the attack, as Assad consolidates control in the region amid a seven-year civil war.

Russia, an ally of Assad, disputes that the Syrian regime carried out the attack on the rebel position, and previously vowed to shoot down any missile strikes over Syria. Iran is also an ally of Syria, with Israel allegedly conducting an air strike on a camp in Syria where Iranian forces are based on Monday.

Atop of these developments, on Wednesday, Saudi Arabia said it intercepted a ballistic missile over the capital Riyadh. The Saudis are leading a coalition in Yemen to oust Houthi rebels backed by Iran, although Tehran denies involvement.

Overnight, news emerged that Russia is set to ban some goods and services from the United States in a retaliatory move after the Trump administration last week announced new sanctions that targeted oligarchs, 14 companies and 17 government officials for a range of activity, including the alleged poisoning of a former spy in the United Kingdom.

This morning, the Paris-based International Energy Agency said production cuts by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers, which include Russia and strong demand growth led to steep drawdowns in commercial oil inventory held by the Organization for Economic and Cooperation Development 35 country bloc.

"With just under half of global oil supply subject to restraint and oil demand growing steadily, the impact on stocks has been substantial," said IEA in their Oil Market Report released this morning.

In February, IEA said OECD commercial oil stocks were drawn down by a larger-than-usual 26 million bbl to 2.841 billion bbl, ending the month with inventory 30 million bbl above the five-year average.

OPEC said their goal with their production agreement is to reduce OECD commercial stocks to their five-year average, although recently suggested revising the target to the seven-year average.

"The [five-year] average could be reached by May, on the assumption of tight balances in 2Q18. Product stocks are already in deficit," said IEA.

The Paris-based agency said OPEC crude production in March fell 200,000 bpd to 31.83 million bpd led by lower output in Venezuela and in Africa, with compliance with their production agreement at 163%. Non-OPEC oil producers that are party to the agreement achieved a 90% compliance rate in March.

"OPEC and non-OPEC producers deepened their cuts to 2.4 mb/d" in March, said IEA. "These extra cutbacks total over 800 kb/d. To all intents and purposes, more than a second Saudi Arabia has been added to the output agreement."

Oil producers in the United States deployed seven rigs this week which follows an 11-rig increase in the prior week to push the total U.S. oil rig count to a more than three-year high at 815, Baker Hughes reported this afternoon. As of today, there are 132 more rigs in operation in the U.S. oil patch than year prior, while up 68 year-to-date.

Stephen Schork with The Schork Report earlier this week told DTN that producers are hedging at record levels, and expects domestic oil production to continue ramping higher for the next four months.

"That oil has already been sold," said Schork.

On Wednesday, the Energy Information Administration reported U.S. oil production increased for a seventh consecutive week to a 10.525 million bpd fresh record high, and on Tuesday projected domestic output would average 10.7 million bpd.

IEA today reiterated its projection that U.S. oil production would grow 1.3 million bpd this year, but added a caveat. "[T]here is concern about bottlenecks in takeaway capacity that have seen recent discounts for WTI Midland versus Houston widen to a record at nearly $9/bbl. This issue applies in Canada as well as in the U.S."

NYMEX May West Texas Intermediate futures gained 23cts on the session with a $67.39 bbl settlement, the highest settlement on the spot chart since the first day of December 2014, and spiked $5.33 or 8.6% on the week. ICE June Brent crude settled at $72.58 bbl, matching the Nov. 27, 2014 settlement on the spot continuous chart, and rallied $5.47 or 8.2% on the week.

NYMEX May RBOB futures settled up 1.08cts at $2.0654 gallon, near Wednesday's $2.0788 7-1/2 month spot high, while up 11.07cts or 5.7% on the week.

NYMEX May ULSD futures settled 1.64cts higher at $2.1002 gallon after settling Wednesday at a $2.1227 gallon 2-1/2 month spot high. On the week, May ULSD futures spiked 14.24cts or 7.35 in value.

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

(BE)

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