Oil Up on Falling Output

NEW YORK (DTN) -- New York Mercantile Exchange oil futures ended higher Monday afternoon, boosted by data showing falling domestic crude production and expectation the U.S. Federal Reserve won’t raise interest rates this year.

“To me the drop in rig-count is just as big a story and the speculation that the Fed won’t hike rates, because it creates an environment for better demand and lower production, and that’s why the market is up today,” said analyst Phil Flynn.

Until last week, most analysts had expected the Fed to raise rates in October or December because the U.S. economy appeared resilient. Not anymore, with the market now expecting the Fed to delay a rate hike until next year after Friday's weaker-than-expected payroll report, Flynn added.

There are also other analysts who believe China may opt for another round of stimulus measure to jumpstart its own growth, which would be supportive of the oil futures complex.

NYMEX November WTI crude futures climbed 72 cents to a $46.26 barrel settlement, off a two-day spot high of $46.94. ICE November Brent crude futures contract rallied $1.12 to $49.25 bbl at settlement, off a better than one-week spot high of $49.87.

In products trade, the NYMEX November ULSD futures contract rose 2.84 cents to $1.5483 gallon at settlement, off a two-day high of $1.5682. NYMEX November RBOB futures climbed 4.39 cents to a $1.3853 gallon settlement, off a two-day high of $1.4008.

On Wall Street, the Dow Jones Industrial Average and S&P 500 rallied 1.8% and the Nasdaq 100 index gained 1.6% Monday afternoon. The dollar seesawed above and below Friday’s close during most of Monday’s session.

The payroll report signaled the era of easy money by the Fed would continue for some time because the central bank has often said its decision to raise rates would be data-dependent. Rates haven't been raised for nine years, providing liquidity oil and other commodities have come to rely on.

Oil analysts also are citing geopolitical risk for oil's advance after Russia last week joined the war in Syria despite caution by the U.S. and NATO, who have accused the Kremlin of acting to protect President Bashar al-Assad.

Turkey on Saturday scrambled two F-16 fighter jets to intercept a Russian plane that entered its airspace. Russia admitted it was an error that would not happen again. Turkey has been the most anti-Assad NATO country, and there is fear a possible accident would pit Russian forces against U.S.-led coalition forces.

Oil the supply front, the Energy Information Administration last week showed domestic crude oil and gasoline stocks increased by 4.0 million bbl and 3.3 million bbl, respectively, during the week-ended Sept. 25. Analysts Monday said they expect to see that crude stocks increased 2.0 million bbl for the week-ended Oct. 2, with gasoline stocks holding steady and distillate stocks rising 500,000 bbl.

Oil futures’ upside was limited, however, by concerns over easing demand due to global economic woes. As a sign of weakening demand, Saudi Arabia cut its official oil prices for next month's shipments to Asia on Sunday; an action that suggests the kingdom is fighting to maintain its market share.

The Saudi move comes after Iran and Iraq had cut their official oil prices last week, raising concern Middle East oil producers are adding more supply to the market at a time demand is easing..

George Orwel can be reached at george.orwel@telventdtn.com