Oil Futures End Down Monday

CRANBURY, N.J. (DTN) -- Oil futures traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled lower, with the West Texas Intermediate and Brent crude benchmarks down for the first session in the last six, trading at two-day lows as the geopolitical risk premium in oil prices eased following the Western allied response late Friday, April 13, to a chemical weapons attack in Syria on April 7.

The pullback follows rallies to three-year, four-month highs for WTI and Brent, while the RBOB contract had rallied to a 7-1/2 month high midweek last week, and ULSD futures to a 2-1/2 month high.

After steep losses during the first week of the second quarter on worry over lost oil demand amid a U.S.-China trade dispute, oil futures spiked on news that a rebel enclave near Damascus was attacked with chemical weapons by Syrian forces loyal to Syrian President Bashar Assad. Russia and Iran are allied with Assad, complicating the reprisal out of concern of dramatically expanding the conflict.

On Friday, the United States, France and Great Britain attacked three chemical facilities in Syria with more than 100 missiles, flattening a chemical research and development center outside Damascus.

"We're going to continue to keep a number of options on the table if Syria and Russia and Iran don't show to be better actors in this process. So I can't go any further than the targets that were part of the strike and successfully hit," said White House press secretary Sarah Huckabee Sanders Monday.

Despite warnings that the United States could again strike Syria and Russian saber rattling over the weekend, a consensus has emerged that the attack will serve as the allied response. That view was reinforced after the White House today walked back comments made Sunday by Nikki Haley, the U.S. ambassador to the United Nations that the United States was preparing additional sanctions against Russia.

Earlier this month, the United States sanctioned several Russian businesses, government officials and oligarchs for a variety of reasons, including the attempted poisoning in Great Britain of a former spy with a nerve agent.

There remains a host of geopolitical issues that could again spike oil futures, including the May 12 deadline U.S. President Donald Trump gave for major changes to the 2015 nuclear accord with Iran. Absent substantial changes to the agreement, Trump said he would decertify the accord that would re-impose sanctions on Iran, including on oil exports.

These events come as a protracted oil surplus was drained by strong demand and a concerted effort by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries in reducing their oil production. The International Energy Agency said a surplus in commercial oil stocks held by the 35 country bloc Organization for Economic Cooperation and Development could be erased by May.

The reduced supply cushion enables oil prices to spike more readily in reaction to geopolitical issues and supply disruptions.

Yet, U.S. oil production has reached a record high at 10.525 million barrels per day (bpd) during the first week of April, according to data from the Energy Information Administration, with EIA projecting domestic oil output to average 10.7 million bpd in 2018.

Baker Hughes reports 18 rigs have been deployed in the U.S. oil patch so far in the second quarter, and 68 year to date to an 815 better-than three-year high. The newly activated rigs suggest oil production will continue to grow.

That view was lent support by the EIA this afternoon in its Drilling Productivity Report, with EIA forecasting a 125,000 bpd increase in tight shale oil production in seven key producing regions in the United States to 6.996 million bpd in May.

At settlement, NYMEX May WTI futures were down $1.17 at $66.22 per barrel (bbl), with ICE June Brent $1.16 lower at $71.42 bbl. NYMEX May RBOB futures settled down 2.55 cents lower at $2.0399 gallon, with the May ULSD futures ending 2.99 cents lower at $2.0703 gallon.

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

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