Oil Ends the Week Lower

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange settled mixed with a downside bias on the session and lower from prior Friday following a week of choppy trading that pressed contracts down for a test key retracement support points for the recent rally through Jan. 3.

Starting the week with a selloff, oil futures recovered midweek on media reports oil production in Russia and Saudi Arabia had declined, supporting bullish sentiment that agreements reached late last year to cut production would be adhered to, and prompt a rebalancing of the global oil market.

On Nov. 30, 2016, the Organization of the Petroleum Exporting Countries agreed to a 1.2 million bpd cut in production, and on Dec. 10 11 non-OPEC oil producing countries pledged a 558,000 bpd reduction, with Russia accounting for 300,000 bpd of the cut. The pledged reduced production is for a six-month term that started Jan. 1.

These agreements prompted noncommercial traders to amass heavy net-long positions in oil futures, which propelled oil futures to 18-month highs on Jan. 3. The long position accumulation by the speculator group also created an overbought market, with an early week selloff through Wednesday morning pressuring crude and RBOB futures to 3-1/2 week lows and ULSD futures to a five-week low as skepticism emerged on whether the lower production would result in a rebalanced market by midyear as had been suggested.

As oil futures were set to breach key support points in reaction to bearish weekly supply data released midmorning Wednesday by the Energy Information Administration, a wave of buying ensued, pushing the contracts up to their mid-December trade ranges.

On Thursday in Abu Dhabi at the Atlantic Council Energy Forum, oil ministers from Saudi Arabia, Iraq and Kuwait commentated on their agreement, with Saudi's minister saying oil production in the kingdom fell below 10.0 million bpd to a nearly two-year low after reducing production more than their 486,000 bpd pledge. He added that Saudi Arabia would make deeper cuts in February.

Iraq's oil minister, Jabar Ali al-Luaibi, said Iraq had cut exports by 170,000 bpd with another 40,000 bpd reduction currently underway, which would match its 210,000 bpd pledge. Kuwait, which agreed to a 131,000 bpd production cut, said it reduced more than 133,000 bpd in crude exports.

"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," said Stephen Schork with The Schork Report midweek.

NYMEX February West Texas Intermediate futures settled down 64cts on the session and $1.35 lower on the week at $52.37 bbl, after trading at a $50.71 bbl 3-1/2 week low on the spot continuous chart on Tuesday. WTI futures traded at a $55.24 bbl 18-month spot high on Jan. 3.

March Brent crude futures on the IntercontinentalExchange settled down 56cts on the session and $1.65 on the week at $55.45 bbl. The nearest delivered Brent contract traded at a $53.58 bbl 3-1/2 week low on Tuesday, and at an 18-month high at $58.37 bbl during the year's first trading session.

NYMEX February ULSD futures ended Friday's session down 2.42cts and erased 5.18cts in value on the week with a $1.6514 gallon settlement. Nearest delivered ULSD futures traded at a $1.6064 gallon five-week low on Wednesday, more than 15.0cts below a $1.7647 gallon 18-month high on Jan. 3.

NYMEX February RBOB futures were flat on the session, up nine points at $1.6117 gallon, while down 2.23cts from prior Friday. Nearest delivered RBOB futures traded at a $1.5410 gallon 3-1/2 week low on Tuesday, sinking from a $1.7095 gallon 18-month high traded during the first session of 2017.

The choppy trade is expected to continue during the holiday-truncated week next week ahead of a Jan. 21-22 meeting of the OPEC Ministerial Monitoring Committee that will supervise the cartel's oil output. Trading is closed on Monday in observance of Martin Luther King, Jr. Day.

On Friday, the market was also under pressure after China reported a 7.7% decline in exports for 2016, the second year in which exports had fallen, while the deepest decrease since 2009. Crude imports by China did jump 8.8% in December, although reports indicate much of this supply went into storage.

Weakness in Chinese oil demand could defer a market rebalance, although world economic growth is expected to accelerate this year, suggesting increased demand. The World Bank on Tuesday forecast the global economy would expand at a 2.7% annual rate this year, above 2016's 2.3% growth rate, with the expansion seen driven by quicker U.S. economic growth.

The Commerce Department this morning reported retail sales in December up a seasonally adjusted 0.6% following a 0.2% boost in November, with the advance driven by vehicle sales, up 2.4%, and gasoline sales, up 2.0%.

Also released this morning, the preliminary January reading for the Michigan consumer confidence index came in at a strong 98.1, although edging off December's final reading at a 98.2 15-year high, and below expectations for an increase to 98.8.

On Tuesday, the EIA in its Short-term Energy Outlook forecast global oil demand to climb 1.63 million bpd this year to 97.2 million bpd, with the consumption rate expected to increase by another 1.51 million bpd in 2018. That follows an estimated year-on-year growth rate for 2016 of 1.43 million bpd.

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

(BAS)

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