WTI, Brent Notch 5th Straight Gain

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange West Texas Intermediate and Intercontinental Exchange Brent futures registered their fifth consecutive advance in closing out trade Friday.

The gains came as greater-than-expected production cuts by the Organization of the Petroleum Exporting Countries and trade negotiations between the United States and China scheduled for early next week increased the likelihood for a better-balanced world oil market in 2019, pushing back at the pessimism that dominated the market in December.

In separate surveys, Bloomberg and Reuters reported a sharp drop in OPEC production in December led by Saudi Arabia, with the Saudis expected to cut production by more than 800,000 barrels per day (bpd) from November's record-high rate of more than 11.0 million bpd to 10.2 million bpd this month.

On Tuesday, Jan. 1, a production agreement between OPEC, Russia and nine non-OPEC oil producing countries reducing output by 1.2 million bpd took effect, and runs through June 30. OPEC's responsible for 800,000 bpd of the reduction, although a Saudi Aramco executive said OPEC output would decline by 1.0 million bpd by the end of January, and the cut could deepen to 1.2 million bpd.

The news suggests the Saudis will ensure compliance with the Vienna agreement reached in December, while Russia is expected to slow walk cuts. Russia is reported to have agreed to lower output by 230,000 bpd.

OPEC member Libya is exempt from the agreement, but internal strife is reported to have prompted an 110,000 bpd unintended loss in output to 1.0 million bpd in December. Production could decline further, with militant activity seen harassing oil field operations in the weeks to come in the North African nation.

This week, mandated production cuts in Alberta were set to shut-in 325,000 bpd of Canadian oil production during the first quarter in an effort to clear excess inventory and narrow a steep discount Canadian crude is trading at compared with key world benchmarks. This afternoon, Baker Hughes said there are 20 rigs in operation in Canada, down 78 against the comparable year-ago period.

As the supply side actions are lending upside price support, a meeting between U.S. and Chinese officials in Beijing Monday, Jan. 7, and Tuesday, Jan. 8, grows the chance of a negotiated settlement between the world's top two economies over their trade disagreements. Tariffs imposed on each country's imports have had a detrimental effect on world growth expectations, and slowed China's economy, with manufacturing slipping into contraction in December. The two countries reached a 90-day truce in their trade dispute on Dec. 1.

Equities rallied on news of the Beijing meeting, with gains accelerating following a morning speech by Federal Reserve Chairman Jerome Powell that suggested the central bank will take a cautious approach in its monetary tightening policy. In December, the Fed hiked the federal funds rate 25 points to 2.5%, with Powell in a follow up news conference last month suggesting the Fed would plod on with its plans hike the key baseline borrowing rate this year, unnerving investors.

The Dow Jones Industrial Average was up more than 700 points, or 3.3%, in late trading, with the S&P 500 Index advancing more than 80 points or 3.4%.

Traders mostly looked past bearish statistics for U.S. oil supply for the week ended Dec. 28 released late morning by the Energy Information Administration. Oil products inventories surged as demand plunged, with the data effected by the holiday.

Implied distillate demand tumbled 1.039 million bpd to a 3.203 million bpd one-year low, with business closures during the Christmas week likely effecting the total. In the United States, diesel demand is primarily used in commercial and industrial sectors.

Gasoline supplied to market also sunk to a one-year low, sliding 726,000 bpd to 8.623 million bpd. Ahead of holidays, wholesalers typically forward position supply.

NYMEX February WTI futures settled up $0.87 at $47.96 bbl.

"Keep an eye out for $50 a barrel, this is a critical level that once we break through a new trend could be starting to the upside," said Phillip Streible, senior market strategist with RJO Futures in a note to clients.

ICE March Brent settled up $1.11 at $57.06 per barrel (bbl), widening its premium to WTI futures for a second session to a better-than-two-week high at $9.10 bbl.

NYMEX February ULSD futures settled up 2.72 cents at $1.7692 gallon, backing off a better-than-two-week spot high at $1.8035 traded ahead of the late-morning EIA report. NYMEX February RBOB futures settled down 0.17 cent at $1.3478 gallon, reversing off a $1.3981 two-week spot high.

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

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