Oil Ends the Day Higher

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange settled higher Friday in front of a meeting in Vienna on Saturday between the Organization of the Petroleum Exporting Countries and non-OPEC oil producers over production rates, while on the week the contracts ended lower.

Nearest delivered oil futures faded from multi-month highs, and in the case of the RBOB contract, a better than one-month high registered Monday, with the highs reached on continued short covering in reaction to the Nov. 30 agreement by OPEC to cut production by 1.2 million bpd starting Jan. 1. Several concerns surround the effectiveness of OPEC's agreement including compliance analysts have said, sparking choppy trade through the week.

Emerging from the Nov. 30 meeting was OPEC's expectation that non-OPEC oil producers would also lower their output rate by 600,000 bpd, with non-OPEC member Russia pledging to cut 300,000 bpd. Those details are to be ironed out in Vienna Saturday, where OPEC will host talks with at least 11 non-OPEC producers based on the latest news reports, with OPEC having invited 14 countries to the meeting.

Media reports indicate that Mexico has said it has no plans to cut production, with only Russia and Oman expressing a willingness to reduce output. Russia was credited with breaking a logjam at the Nov. 30 meeting by pledging to cut 300,000 bpd of its output, but has since hedged on the agreement, demanding full compliance by OPEC in order to carry out the reduction.

A shoddy record of OPEC compliance with their quotas, a production ramp up by several OPEC members and Russia ahead of the agreement, and exemptions for OPEC member's Nigeria and Libya because of internal hostilities has drained some of the market's exuberance that the agreed to production cuts would do enough to rebalance an oversupplied oil market. Should Saturday's meeting result in a failure to reach the 600,000 bpd cut by non-OPEC members, a selloff is expected.

Friday afternoon, NYMEX January West Texas Intermediate futures settled 66cts higher at $51.50 bbl while slipping 18cts from prior Friday. On the IntercontinentalExchange, February Brent futures ended 44cts higher on the session while up 39cts on the week to $54.33 bbl.

NYMEX January ULSD futures gained 1.15cts on the day with a $1.6374 gallon settlement while down 2.07cts from prior Friday. January RBOB futures settled up a fractional 0.26cts at $1.5073 gallon, while lost 5.18cts in value on the week. Building supply and declining demand pressured the gasoline contract.

Many analysts also note that higher crude prices would prompt an increase in tight oil production within the United States, with a number of shale oil producers able to make a profit on some wells above $50 bbl, and many more at $55 to $60 bbl. Greater production from the United States would mute OPEC's agreement and delay a market rebalancing.

That suggestion is supported by this week's drilling activity, with oil services provider Baker Hughes, Inc. this afternoon reporting the largest one-week increase in deployed oil rigs in the United States since April 2014 at 21 to a 498 nearly 11-month high. It was the sixth consecutive week in which the U.S. oil rig count has increased, and followed a 19-rig weekly increase in mid-November.

Also limiting the upside in crude prices was a stronger U.S. dollar. The U.S. dollar rallied in index trading for a second consecutive session, resuming its post-election day surge that included an increase to a 13-1/2 year high in late November. The dollar has an inverse relationship with domestic oil prices since oil trades globally in the greenback.

Already at record highs, major equity indices continued to gain Friday, while consumer sentiment spiked 4.2 points and well above expectations to 98 in December, according to a preliminary index from the University of Michigan.

Brian Milne can be reached at brian.milne@dtn.com

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