Oil Futures Rally on Short-Covering

NEW YORK (DTN) -- New York Mercantile Exchange oil futures rallied Friday morning after comments by Federal Reserve officials and the growing prospect of a deal to freeze production by leading oil producers triggered a new round of short-covering ahead of the weekend break.

"Oil companies have cut capex so much in the past year and rigs are falling for both crude oil and natural gas while demand is relatively strong," said analyst Phil Flynn at Price Futures. "Also, there's a realization that the first meeting in about 15 years between OPEC and non-OPEC is unlikely to end without a deal to freeze or cut production. The market is pricing that we'll have a deal, and then we have dovish comments from Fed officials."

Flynn's comment came on the heels of Russia's oil minister saying that an agreement is likely to be reached with the Organization of Petroleum Exporting Countries to freeze output at a meeting on April 17 in Doha, Qatar.

At last look, NYMEX May West Texas Intermediate crude oil futures surged $2.14 to $39.40 bbl, near a $39.46 one-week high. June Brent crude futures on the IntercontinentalExchange climbed $1.91 to $41.34 bbl, near a two-week spot high of $41.42.

NYMEX May ULSD futures spiked 5.98cts to $1.1855 gallon, near a one-week spot high of $1.1877, while May RBOB futures jumped 5.73cts to $1.4385 gallon, near a $1.4406 one-week high.

Also bolstering oil futures was another cold blast in the U.S. Northeast, a decline for weekly U.S. crude oil supply and summer maintenance in the North Sea oil fields that would take some oil supply out of the global market.

"With U.S. production falling and new worries about the outlook for natural gas production, it is starting to become clear that prices are going to have to move higher to offset the looming crash in U.S. oil and gas production," Flynn said.

The Energy Information Administration on Wednesday reported U.S. crude oil production fell 14,000 bpd to 9.008 million bpd in the week-ended April 1, and commercial crude stocks unexpectedly feel for the first time in eight weeks, drawn down 4.9 million bbl to 529.9 million bbl.

Oil services firm Baker Hughes said the average U.S. rig count for March was 478, down 54 from the 532 for February and 632 below the 1,110 rigs counted in March 2015. The U.S. on land rig count totaled 451, down 55 from February and 616 lower than the number counted in March 2015. The market now awaits weekly oil rig count due later Friday.

Yellen's comments also stirred optimism. Defending the central bank's decision to tighten monetary policy in December, Yellen said late Thursday the U.S. economy is on sound footing with hints of inflation, and the U.S. labor market was close to full strength.

This morning, New York Fed President William Dudley supported the cautious approach by the Fed in raising rates while expecting domestic growth that, in turn, supports demand for oil.

There's consensus the U.S. economy is not as strong as it should be but it's better than other developed economies while emerging economies see slowing growth.

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