Oil Rallies on Optimism for Budget

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

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange are rallying early Tuesday following Monday's losses, with the advance triggered by production cuts by the Organization of the Petroleum Exporting Countries, optimism for a U.S./China trade deal that avoids an escalation in their dispute, and a tentative budget deal reached in Congress that would avert a partial federal government at week's end.

In midmorning Tuesday trade, Nymex March West Texas Intermediate futures were up $1.05 near $53.50 barrels (bbl), with ICE April Brent $1.40 higher near $62.90 bbl. Nymex March ULSD futures were 3.2cts higher near $1.9240, and the March RBOB contract rallied 3.5 cents to near $1.4540 gallon.

The U.S. dollar backed off a 97.0 two-month high reached overnight, weakening in early trading, with a stronger dollar bearish for WTI futures. The WTI contract also held support Monday, trading at a $51.23 bbl two-week low on the spot continuous chart.

The Dow Jones Industrial Average jumped 250 points in early trading on reports indicating a bipartisan team of negotiators in Congress reached a tentative deal to fund the U.S. government which includes funding for a 55-mile new barrier along the southern U.S. border. The funding is less than U.S. President Donald Trump's $5.7 billion demand, with reports indicating Trump is undecided on whether he will sign the bill should it reach his desk.

Separately, Trump said he wants to meet with Chinese President Xi Jinping "very soon" regarding a U.S./China trade agreement, easing anxiety that the United States and China were headed for an escalation in their trade dispute in March. Previously Trump said a trade deal would not be reached until he met with Xi, while also indicating late last week that he would not meet with Xi in February even as a 90-day truce in their trade dispute expires on March 1. However, Trump will meet with North Korean leader Kim Jong-un on Feb. 27-28 over nuclear disarmament, a reason that Trump might push back a 15% hike in $200 billion in U.S. imports of Chinese goods on March 2 to 25%.

Cabinet level representatives from the United States are meeting with their Chinese counterparts in Beijing this week.

Oil futures were also boosted after OPEC confirmed a decline in production in January, reporting in their Monthly Oil Market Report this morning that crude production by its members dropped 797,000 barrels per day (bpd) from month prior to 30.806 million bpd, its lowest output rate since March 2015. OPEC also reported Russian crude production declined 90,000 bpd in January to 11.56 million bpd, with output in November at an 11.65 million bpd post-Soviet high.

Russia and nine other non-OPEC oil producers joined OPEC in December in agreeing to 1.2 million bpd in output cuts through the first half of 2019, although Russian output is still well above its voluntary production total of 11.191 million bpd. Earlier this month, Russian Energy Minister Alexander Novak said it would take a few months before Russia would reach compliance with the Vienna accord. Cold weather in some Russian oil fields prevents operators from quickly cutting output for fear of long-term damage to the wells.

The Energy Information Administration will release its monthly Short-term Energy Outlook near midday New York time, and the International Energy Agency their Oil Market Report Wednesday morning. Late Tuesday afternoon, the American Petroleum Institute will publish U.S. supply data findings for the week-ended Feb. 8, with the EIA set to release its weekly report midmorning Wednesday.

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

(BAS)

Brian Milne