WTI, Brent Futures End at 2-Mo. Highs

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange rallied Friday ahead of the three-day holiday weekend and advanced on the week. West Texas Intermediate, Brent and ULSD futures settled at two-months highs on their spot continuation charts and RBOB futures at a five-week high, as the outlook for oil demand growth brightened and Saudi Arabia sharply cut output.

News reports this week showed ongoing progress in trade negotiations between the United States and China, which has firmed sentiment the two economic superpowers would reach an agreement settling their trade dispute. In the latest development, news reports indicate China would spend heavily on U.S. imports over the next six years to bring its trade balance with the United States to zero, which equates to a $1 trillion buying spree for U.S. goods.

This news followed a Wall Street Journal report late Thursday that U.S. Treasury Secretary Steven Mnuchin during a strategy meeting contemplated removing some or all the tariffs on Chinese imports as a way to incentivize deeper concessions by China.

The United States and China are negotiating during a 90-day truce in their trade dispute that expires March 1, with the United States set to hike tariffs on $200 billion worth of Chinese imports from 10% to 25% on March 2 if the two sides fail to reach an agreement.

Tariffs lobbed at one another for nearly 10 months have slowed world trade and China's economy, prompting Beijing this week to announce 1.3 trillion yuan in stimulus to boost its economy. Investors feared an escalation in their trade dispute could steer the world economy into recession.

The brightening outlook for a U.S.-China trade deal improved market psychology and oil demand expectations, which were also bolstered in early trade following the monthly Oil Market Report from the International Energy Agency released this morning in which the Paris-based analysts maintained their expectations for world oil demand to grow 1.4 million bpd this year. That's a quicker pace than in 2018 when the global consumption rate grew 1.3 million bpd annually, with the IEA saying lower oil prices would offset slowing economic growth to support demand.

Crude production by the Organization of the Petroleum Exporting Countries dropped 590,000 bpd to 32.39 million bpd in December, according to the IEA, which follows OPEC's monthly oil report released Thursday citing secondary sources that reported a 751,000 bpd decline. In both estimates, Saudi Arabia cut the most, with lower output also reported for Libya, Iran and Venezuela.

OPEC indicated Saudi output dropped 468,000 bpd last month from November's record high in a display of commitment to balance the world oil market. In December, the Saudis agreed to 322,000 bpd in voluntary production cuts from October's output rate to 10.311 million bpd during the first half of 2019, with the kingdom's production rate last month at 10.553 million bpd.

And, while the Energy Information Administration on Wednesday reported U.S. crude production reached a fresh record high of 11.9 million bpd last week, Baker Hughes reported a 21-rig decline in the number of oil rigs in operation this week. It was the third straight week in which the rig count has fallen, with 33 rigs removed from service so far in 2019, lowering the U.S. oil-rig count to an 852 eight-month low.

Oil futures also found support from below normal temperatures across large swathes of the United States, with colder-than-usual weather for the eastern half of the United States forecast through Feb. 15 by the National Weather Service's Climate Prediction Center.

As the cold weather forecast, along with the three-day break in trading, sparked short-covering, a move above the 50-day moving averages by all the contracts triggered fresh buying.

NYMEX February WTI futures, which expires Tuesday (1/22), rallied $1.73 to a $53.80 bbl settlement, while up $2.21 or 4.3% on the week. The March contract settled $1.68 higher at $54.04 bbl, with a move by the U.S. dollar to a fresh two-week high failing to reverse the upside.

ICE March Brent futures settled $1.52 higher on the session and up $2.22 or 3.7% from prior Friday to a $62.70 bbl settlement. Brent's contango market structure is unwinding, with March moving into a premium against April delivery, and Brent in backwardation with the July contract -- a bullish development supported by the steep cuts in OPEC production.

NYMEX February ULSD futures settled 3.17cts higher at $1.9160 gallon, and on the week gained 3.63cts. February RBOB futures advanced 2.28cts to a $1.4528 gallon settlement, while up 5.21cts or 3.7% compared with prior Friday.

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

(BAS)

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