Oil Settles Sharply Higher

Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange settled sharply higher Wednesday, erasing Tuesday's losses and then some, as speculative buying erupted in a fury as contracts neared key support points in response to bearish weekly supply data released midmorning.

Computer-automated algorithmic trading was cited for the whiplash turnaround in oil futures as they neared Tuesday's lows in the immediate reaction to large across the board supply builds reported by the Energy Information Administration.

West Texas Intermediate futures with nearest delivery slid to a $50.75 intraday low, set to take out Tuesday's $50.71 3-1/2 week low and retracement support at $50.26 bbl.

"We know Wall Street is holding record length, and are extremely exposed to the upside" said Stephen Schork with The Schork Report, saying "as we approach $50, we can expect a lot of rhetoric out of OPEC, a lot of rhetoric out of Russia that they're complying."

NYMEX WTI futures traded at a $55.24 18-month high on the spot continuous chart on the first business day of 2017, but buying momentum fizzled and oil futures sold off Monday and Tuesday as skepticism 1.758 million bpd in oil production cuts by the Organization of the Petroleum Exporting Countries and 11 non-OPEC oil producing countries including Russia during the first half of 2017 would rebalance the market by midyear as some have suggested.

"And we note that Commitment of Traders data for the week ended January 3 showed record managed money long positions. These positions have been built up over months from lower price levels, but they were all marked to the market on December 30," noted Tim Evans, futures specialist with Citi Futures, in an early week advisory to clients. "We're not sure of the risk tolerance on these expectations."

On Tuesday, the EIA released its Short-term Energy Outlook reinforcing chatter in the marketplace that the goal of the production cuts to accelerate a market rebalance between supply and demand could be muted as producers not part of the pacts hike their output. Specifically, there's uncertainty regarding near-term production rates for Nigeria and Libya, both OPEC members but exempt from the Nov. 30, 2016 agreement. U.S. oil production is also seen climbing as oil prices advance, with EIA suggesting a market rebalance could be delayed until mid-2018.

EIA's weekly report showed the recent buildup in the oil rig count, which has increased every week since the start of November, up 88 in ten weeks, is boosting production. EIA reported a 176,000 bpd increase in crude production during the first week of 2017 to an 8.946 million bpd nearly nine-month high.

EIA also reported a larger-than-expected 4.1 million bbl increase in U.S. commercial crude supply, a much larger-than-expected 5.0 million bbl increase in gasoline supply, and an 8.4 million bbl jump in distillate fuel inventory for last week.

NYMEX February WTI futures settled up $1.43 at $52.25 bbl, and March Brent on the IntercontinentalExchange ended $1.46 higher at $55.10 bbl. NYMEX February ULSD futures settled 4.1cts higher at $1.6524 gallon, with the February RBOB contract up 4.62cts at $1.5929 gallon.

All the contracts remain down from Friday (1/6).

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

(BAS)