Oil Futures Surge on Momentum Buying

NEW YORK (DTN) -- New York Mercantile Exchange oil futures rallied Monday afternoon, with West Texas Intermediate posting the highest settlement this year on momentum buying amid hope demand would increase while U.S. oil production is expected to continue declining, and the likelihood the Organization of Petroleum Exporting Countries would freeze output increases by the day.

"This is all momentum buying because sentiment is tilted higher, there's technical buying interest," said Jim Ritterbusch, president of Ritterbusch Associates in Galena, Illinois. "The focus is on [U.S.] production declining more."

Others agreed.

"This was a follow-through rally, helped by the fact news over the weekend that China could implement more stimulus measures and the [U.S.] rig count has fallen to the lowest number since 1940s," said analyst Phil Flynn at Price Futures Group in Chicago.

NYMEX April WTI crude futures settled $1.98 or 5.5% higher at $37.90 bbl, the highest settlement level since Dec. 24, 2015, after posting a two-month high on the spot continuation chart of $38.11. Nearest delivered WTI futures is in a short-term uptrend, with resistance at the $40.00 bbl Fibonacci retracement point.

"As it stands now, with this technical breakout [for WTI] above $35, I target $43 as a potential upside target. My bullish view moves back to neutral if Apr WTI closes below $34.50," said David Thompson, vice president at Powerhouse brokerage in Washington, D.C.

May Brent crude futures on the IntercontinentalExchange climbed $2.12 or 5.5% to a $40.84 bbl settlement, edging off a three-month spot high of $41.04. It was the first time since Dec. 10 that the nearest delivered contract crossed above $40.00 bbl. Nearest delivered Brent has retracement resistance at $43.35 bbl.

"Speculative positioning has become increasingly bullish in recent weeks, driven by news of substantial upstream capex cuts, frequent talk of an OPEC/non-OPEC output freeze, and bits of positive economic data," said Barclays Capital in a research note to clients.

In products trade, the NYMEX April ULSD futures contract rallied 6.12cts or 5.3% to $1.2225 gallon, off a nearly three-month high on the spot continuation chart of $1.2273. April RBOB futures spiked 6.06cts or 4.5% to $1.3927 gallon, off to a better-than three-month spot high of $1.40.

"The strength is due to the fact that we have a strong demand for gasoline, but that's due to exports ... wholesalers are restocking," said Ritterbusch.

The advance for RBOB futures also reflects the seasonal shift in the gasoline market with refinery maintenance season expected next month to curtail product output ahead of the summer driving season.

On Friday, oil services provider Baker Hughes showed an eight rig decline to 392 rigs during the week-ended March 4, the eleventh straight weekly decline. The number of active oil rigs has fallen sharply since peaking early in the fourth quarter 2014. The rig count is seen as a proxy for U.S. crude production, which peaked in April 2015 at 9.694 million bpd, which was the highest monthly production rate since April 1971. Last week, the Energy Information Administration reported domestic crude production at 9.077 million bpd, the lowest since November 2014.

Overseas, leading oil producers including Russia and Saudi Arabia have announced they could freeze their production at January's rate if others join them. This morning, United Arab Emirates' oil minister Suhail al Mazrouei said current oil prices are forcing all suppliers to freeze their production.

Looking ahead, the Energy Information Administration will release its Short-term Energy Outlook report on Tuesday (3/8) and the International Energy Agency will issue its March Oil Market Report on Friday (3/11). OPEC will release its Monthly Oil Market Report on March 14.

George Orwel, 1.718.522.3969, george.orwel@dtn.com, www.schneider-electric.com. (c) 2016 Schneider Electric. All rights reserved.