Oil Futures Settle Higher on Weather

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled higher this afternoon after rallying on expectations of rising heating demand as winter weather moves to the Northeast and an anticipated drawdown in weekly domestic crude oil supply.

Today's nearly 3% rebound across the board came a day after the spot-month February West Texas Intermediate crude contract lost 3.4% and ahead of the release of an oil inventory report for the week-ended Dec. 25 by industry group American Petroleum Institute.

"Trading volume today has been very light [but] as far the rally heating oil may be catching a bit of short-covering spurred on by the end-of-the-year position squaring as well as the short-lived burst of cold some parts of the country are receiving, but I still remain bearish on ULSD," said David Thompson, vice president at Powerhouse in Washington, D.C.

Others agreed.

"Part of the reason we had a big rally is the market selloff was overdone but also something that has not been mentioned before is weather," said analyst Phil Flynn at Price Futures Group. "We've had warm weather recently, but now it seems the regular weather pattern has returned, with the burst of winter prompting speculation that demand will increase."

The NYMEX February WTI crude contract settled up $1.06, or 2.9%, at $37.87 per barrel (bbl) while the ICE February Brent futures contract climbed $1.17, or 3.3%, to a $37.79 bbl settlement. In spread trade, WTI closed at an 8-cent premium over Brent.

In products trade, the NYMEX January ULSD futures contract rallied 3.91 cents to a $1.1295 gallon settlement, off a better than one-week high of $1.1388. The January RBOB futures contract spiked 4.34 cents to a $1.2760 gallon settlement, off a two-day high of $1.2815.

On Wall Street, equities were higher, lifted by oil's rally, while the dollar strengthened.

The biggest driver for oil prices were wintry conditions forecasted in the Northeast, bringing ice and snow to the world's biggest heating oil market for the final days of 2015. Flooding is reported in the Southeast and a burst of cold is seen in the Midwest. The storms are causing flight delays after unleashing tornados in Texas, Oklahoma and other parts of the central plains.

"With the prospect of cooler January temperatures in both Europe and the U.S. helped lift heating oil and gasoil prices on either side of the Atlantic," said analyst Tim Evans at Citi Futures. "Prices may also be getting a lift ahead of U.S. petroleum inventory data for the week-ended Dec. 25 that's expected to include a second weekly decline in total commercial crude oil stocks."

A survey of analysts by Schneider Electric shows the market expects crude inventories to have been drawn down by an average of 2 million bbl, with crude stocks at the Cushing supply hub in Oklahoma seen down 500,000 bbl.

The American Petroleum Institute is scheduled to release its weekly petroleum data at 4:30 p.m. EST and the Energy Information Administration at 10:30 a.m. EST on Wednesday.

Globally, while Iran is expected to boost its oil production next year after sanctions on Tehran are lifted, Saudi Arabia could be forced to limit its production if oil prices remain low.

Saudi Arabia on Monday announced plans to cut its record state budget deficit with spending cuts and reduction its energy subsidies as the sharp oil price hits its reserves of cash. Analysts think the Saudis could cut production if oil prices remain low.

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