Oil Futures End Mixed

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest-delivered New York Mercantile Exchange oil futures and Brent on the Intercontinental Exchange settled Thursday's session mixed after choppy trade spurred by bearish supply data from the Energy Information Administration and bullish developments in Venezuela, one of the five founding members of the Organization of the Petroleum Exporting Countries.

Economic data was also mixed, with sluggishness in Europe's manufacturing and service activities in January countered by strong growth in those two sectors in the United States. Optimism for a U.S.-China trade agreement was somewhat offset by the ongoing partial government shutdown that could erase any prospect of U.S. economic growth in the first quarter should it continue for several more weeks, suggests at least one analyst.

Heavy and medium crude grades have seen their values strengthen as an already tight heavy crude market might get tighter if the United States moves forward with its threat to sanction Venezuela's oil industry as it seeks to push out Venezuelan President Nicolas Maduro, who was sworn into a second six-year term last week.

During Wednesday's mass demonstrations against Maduro, who won a second term in sham elections last year, National Assembly leader, Juan Guaido, declared himself "president in charge." The United States quickly recognized Guaido as Venezuela's legitimate leader, and was joined by Columbia, Paraguay, Brazil, Argentina, Chile, and Canada. Today, U.S. Secretary of State Mike Pompeo said the United States is ready to send $20 million in humanitarian aid to Venezuelans, who have suffered amid an economic collapse.

Venezuela's heavy crude is prized by U.S. Gulf Coast refiners, who blend it with light shale oil to efficiently operate their refineries that were retooled more than a decade ago to run on heavier grades. With Mexico's crude production declining, and Canada's heavy grades mostly bottled up due to a lack of pipeline capacity, there is limited supply availability.

Venezuela is currently the third largest exporter of crude to the United States, averaging about 500,000 barrels per day (bpd). There's talk that the United States could tap its Strategic Petroleum Reserve to make up for the shortfall in heavy crude if sanctions are slapped on Venezuela's oil sales.

The market is reacting to these developments slowly, with analysts noting Venezuelan crude production has been sliding for months, tumbling to 1.148 million bpd in December compared with 2.357 million bpd averaged in 2012 -- the year before Maduro became president. RBC Capital Markets estimates output could drop by as much as 500,000 bpd more this year.

Despite an unexpected 8.0 million barrels (bbl) build in U.S. commercial crude stocks reported late morning by the Energy Information Administration for the week-ended Jan. 18, NYMEX March West Texas Intermediate futures gained $0.51 to settle at $53.13 bbl, while ICE March Brent crude eased for a third day, down $0.05 at $61.09 bbl. Brent moved back into contango through August delivery, while Brent's premium to WTI narrowed to a $7.96 bbl four-week low.

With the potential for Venezuela's crude to be banned in the United States, it would likely add to global supply by finding buyers in Asia.

Oil products ended shallowly mixed despite a 4.1 million bbl build in gasoline stocks to a 259.6 million bbl record high, with U.S. refiners moving into seasonal maintenance programs.

NYMEX February ULSD futures eased 0.3 cent to settle at $1.8856 gallon, and the February RBOB contract firmed 0.19 cent to $1.3878 gallon.

Oil products were also lent support from bullish domestic macroeconomic data.

The U.S. flash composite Purchasing Manager's Index for January released during early trading topped market expectations, surging 0.9 points to 54.5 compared with estimates for an increase to 54.2, with manufacturing driving the advance. In contrast for expectations manufacturing slowed this month from 53.9 to 53.5, the sector jumped to 54.9. Services increased at an as expected 0.8 points to 54.2.

These reading ran contrary to similar data in the eurozone, where the flash composite PMI for January tumbled 0.6 points to a 50.7 five-year six-month low. The European Central Bank this morning left monetary policy unchanged as it copes with its slowing economy, while the U.S. dollar strengthened to a three-week high.

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

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Brian Milne