Oil Futures End Up on Short-Covering

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and the Brent contract on the Intercontinental Exchange settled higher Friday on short covering ahead of the weekend, and cut weekly losses with the ULSD contract ending flat on the week.

Oil futures shook off early weakness instigated by tumbling equity values led by tech stocks that again sold off, with equities also under pressure from doubts over global oil economic growth exacerbated by the U.S.-China trade dispute. China's economy has slowed, with signs that U.S. tariffs are having a negative effect on the world's second largest economy.

These concerns matter to oil futures, with oil demand growth tied to economic expansion. It also prompted the technical committee overseeing a production agreement between the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers on Thursday to urge consideration in reducing production in 2019 in an effort to avoid creating another global supply surplus. The committee pointed to building inventories as another factor.

On Wednesday, the Energy Information Administration reported days of forward crude supply in the United States at 25.9 on Oct. 19, a nearly five-month high, and up from a 22.3 days three-year, seven-month low during the first week of September.

The short-covering gains have found support in strong U.S. consumption, with the EIA reporting implied demand for oil products this year running 529,000 barrels per day (bpd), or 2.6%, above a year ago through Oct. 19. Underpinning that strength is a robust U.S. economy, with the Bureau of Economic Analysis Friday morning estimating U.S. gross domestic product grew by an annualized 3.5% rate in the third quarter, topping estimates, although slower than the 4.2% U.S. expansion in the second quarter.

Despite U.S. sanctions on Iranian oil exports set to take effect two Mondays from now, Saudi Arabia's ramp up in crude production, up 200,000 bpd from September to 10.7 million bpd currently and headed to 11.0 million bpd, pressured global crude prices. The Saudis are using oil as a balm, hoping to turn world attention away from the kingdom after acknowledging the premediated murder of a prominent Saudi dissident at their consulate in Istanbul, Turkey.

Russia is also lifting their output following previous investment in the upstream business and completion of maintenance at their Sakhalin projects. In September, Russian oil production was 11.74 million bpd, according to the International Energy Agency. The Paris-based agency expects Russian oil production to average 11.52 million bpd this year, up from 11.36 million bpd in 2017, and to ramp up to 11.77 million bpd in 2019.

West Texas Intermediate futures were buoyed, too, by a reversal in the U.S. dollar from a 10-week high traded overnight. Oil trades internationally in the U.S. dollar.

NYMEX December WTI futures settled up $0.26 at $67.59 per barrel (bbl), while down $1.53, or 2.2%, on the week. ICE December Brent futures settled $0.73 higher at $77.62 bbl, while down $2.16, or 2.7%, from prior Friday.

NYMEX November ULSD futures settled up 2.49 cents at $2.3030 gallon, while November RBOB futures edged 0.21 cent higher to $1.8150 gallon while down 9.89 cents, or 5.2%, on the week.

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

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