Oil Advances to 3-Day Highs

NEW YORK (DTN) -- New York Mercantile Exchange oil futures advanced to three-day highs on Friday morning, with the complex positioned to reduce week-over-week losses as supply continues to run ahead of demand.

The complex tracked equities higher overnight, but the domestic stock market has since trimmed gains after new data showed U.S. industrial production fell 0.2% in September, in the latest sign of a slowing economy.

Analysts said the upside was also limited by a stronger dollar and ongoing weak market fundamentals. Traders are awaiting the weekly U.S. rig-count report by oil services firm Baker Hughes due at midday for an indication of the direction of U.S. oil production.

At 8 a.m. CDT, NYMEX November WTI futures rose 69 cents to $47.07 barrel, near a three-day high at $47.20. The December ICE Brent crude contract rose 45 cents to $50.18 bbl, with the November contract having expired Thursday.

In products trade, NYMEX November ULSD futures edged up 0.97 cents to $1.4960 gallon, off a three-day spot high of $1.5023. November RBOB futures climbed 2.27 cents to $1.3299 gallon, off a $1.3308 three-day high.

On Wall Street, U.S. stock markets climbed tracking higher overseas bourses, while the dollar index bounced off Thursday’s 6-1/2-week low and rallied to a three-day high.

The U.S. Energy Information Administration's report for the week ended Oct. 9 released Thursday showed domestic crude oil inventories soared by 7.6 million bbl that was the highest weekly increase in six months. A 1.1 million bbl build at the Cushing, Oklahoma delivery point for NYMEX West Texas Intermediate was included in the mix.

Total U.S. oil supplies are holding near record highs and tepid demand has worsened as the global economy stumbles. The EIA showed a 1% year-over-year increase in demand for gasoline while distillates demand tumbled 2.5% versus year prior. Implied crude demand posted a sizable 292,000 barrels per day weekly decrease amid a 1.5% dip in refinery runs.

One part of the weekly EIA data that was considered bullish was an 80,000 bpd decline in domestic crude oil production to 9.1 million bpd.

On products, EIA reported gasoline inventories dropped 2.6 million bbl last week while distillate fuel inventories fell 1.5 million bbl, both more than expected.

Globally, the Organization of Petroleum Exporting Countries is producing more crude oil than its agreed output ceiling of 30 million bpd, a situation that has helped to keep oil prices low and caused oil firms to scrap production projects. Long term, this situation could turn bullish, said analysts.

“Before long, prices will need to stop deterring supply and, instead, do the opposite,” said a Barclays Capital report. “Prices are likely to move higher, starting in the latter half of 2016, providing producers with incentives to mitigate the decline in existing supply. We base this conclusion on detailed modeling of the elasticity of supply, which shows conventional oil production declines accelerate when prices are low.”

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