Oil Rallies in Friday Trade

CRANBURY, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange rallied in early trading Friday following two days of sharp selling triggered by a rapid increase in U.S. commercial crude supply during the fall refinery turnaround season and on an expanding view that the world economy would grow at a slower pace than previously expected.

The market is also contemplating the implications of the disappearance of Saudi dissident and Washington Post journalist Jamal Khashoggi, and the possibility that he was ordered murdered by Saudi Crown Prince Mohammed bin Salman.

U.S. President Donald Trump said it "looks like he is dead," while U.S. Treasury Secretary Steven Mnuchin on Thursday cancelled a trip to the kingdom where he was to attend an investment conference that has been called "Davos in the Desert." There are increasing calls for the United States to sanction Saudi Arabia over the incident.

"The call for Saudi Economic Sanctions would force the Saudis to pump less oil to drive up prices for economic reasons. They would need the money," said Chicago-based Phil Flynn, senior market analyst with the PRICE Futures Group in a morning note.

Friday morning's advance in West Texas Intermediate futures comes despite a stronger U.S. dollar that is trading at a 1-1/2 week high and in position to strengthen to a two-month high. The stronger dollar comes as the Federal Reserve tightens monetary policy and U.S. economic growth continues to roar. It also makes crude oil more expensive for foreign buyers since oil trades globally in the U.S. currency. This dynamic is hitting emerging economies like India very hard, and could slow the growth rate in oil demand.

The International Energy Agency still expects global oil demand to average at a record high at about 100 million barrels per day (bpd) this quarter before easing in the first quarter 2019.

China reported overnight that third quarter gross domestic product fell a more-than-expected 0.2% to 6.5%, the slowest growth rate since early 2009. Industrial production also slowed in the world's second largest economy in September, down 0.3% to 5.8% year-on-year compared with expectations for a 6.0% annual increase.

Goldman Sachs head of commodities research Jeff Currie told S&P Global Platts this week that it's unlikely Brent crude would hit $100 barrel (bbl) in the near term even as U.S. sanctions on Iranian oil exports take effect in early November. PIMCO's Greg Sharenow in a blog earlier this month said it would take "additional supply disruptions" to push oil prices above early-month highs. On Oct. 3, Brent crude traded at $86.74 bbl and West Texas Intermediate at $76.90 bbl.

Near 10 a.m. ET, November WTI was up $1.00 at $69.65 bbl ahead of its expiration at the close of business Monday Oct. 22, with the December contract at a $0.10 premium to the expiring contract. WTI futures moved out of backwardation this week on easing worry over supply availability as U.S. commercial crude stocks rapidly build during fall refinery turnarounds, up 20.5 million bbl to a 3-1/2 month high during the three weeks ended Oct. 12. WTI futures fell to a $68.47 five-week spot low Thursday.

ICE December Brent crude was outpacing the advance by WTI futures, up $1.45 at $80.75 bbl, reversing off Thursday's $78.69 four-week spot low. Brent's premium to WTI is trading at about $11 bbl, the widest arbitrage since early June, and an incentive for U.S. crude exports.

Nymex November ULSD futures were up 3 cents near $2.3250 gallon after trading at a nearly four-week low on the spot continuous chart at $2.2836 Thursday. Nymex November RBOB futures were 4 cents higher near $1.9320 gallon, reversing off a $1.8803 seven-month spot low traded Thursday.

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

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