Oil Futures Higher Friday

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled higher Friday afternoon after rallying on evidence global oil supply is easing and ahead of a meeting on Sunday, Jan. 22, by the Organization of the Petroleum Exporting Countries that's expected to demonstrate that the producer group can enforce strict compliance with its Nov. 30 agreement to cut production by 1.2 million barrels per day (bpd) to 32.5 million bpd.

Sunday's meeting in Vienna will also be attended by Russia, one of the 11 non-OPEC nations that agreed to cut their production by a combined 558,000 bpd, with Russia accounting for 300,000 bpd of the supply reduction. The agenda for the meeting is to work out a compliance mechanism to ensure signatories to the accords follow through on their pledges. Some analysts speculate more could come out of the meeting that sets the stage for the futures market in the near term.

"I'm bullish going into next week because I think OPEC may signal further cuts down the road or they may issue strong rhetoric about strict compliance with the cuts already announced," said analyst Phil Flynn at Price Futures in Chicago. "They want to make sure this market doesn't fall again, so I think we may have seen lows for the year."

The International Energy Agency said Thursday that OPEC is implementing the output cuts that were agreed to last year, with OPEC crude production declining 320,000 bpd from record rates to 33.09 million bpd in December 2016 on lower Saudi output and supply disruptions in Nigeria, IEA said. The Saudis pledged to cut 486,000 bpd, and have been discussing with their customers to cut as much as 7% of their output, which is equivalent to about 700,000 bpd.

Saudi energy minister Khalid al-Falih said today that OPEC is showing a high degree of compliance with their agreement, and that 1.5 million bpd of crude oil supply has already been taken out of the market.

Expectations about the outcome of Sunday's OPEC compliance meeting combined with signs of strong economic growth in China to offset data showing rising U.S. drilling rigs, said Flynn, although the rig count data capped the upside for oil futures.

The number of rigs drilling for oil rose 29 this week to 551, the biggest week-over-week increase since mid-April 2013, with the number of oil rigs in operation the most since late November 2015, Baker Hughes, Inc. said this afternoon. The count is 41 higher than the same week in 2016.

The rig count is an indicator of the trend line in domestic oil production, and the latest data issued Thursday by the Energy Information Administration showed production nearly flat on a week-over-week basis at 8.944 million bpd after a 176,000 bpd surge week prior.

EIA also reported Thursday a surprise crude stock build of 2.3 million bbl nationwide for the week-ended Jan. 13. The market's reaction to the build was offset by a draw at the Cushing supply hub, the delivery point for NYMEX WTI futures, where crude stocks fell by 1.2 million barrels (bbl).

Looking ahead, Donald Trump was inaugurated Friday as the 45th president of the United States, with the president expected to lessen the regulatory burden on oil and financial industries, a move that could unleash domestic oil production and increase liquidity in the market as more investment banks seek to increase their participation in the oil market.

At settlement, NYMEX February West Texas Intermediate futures expired up $1.05 at $52.42 bbl, with the March contract settling $1.10 higher at $53.22 bbl. ICE March Brent crude oil futures rose $1.33 to a $55.49 bbl settlement. Both crude grades were flat on the week.

NYMEX February ULSD futures advanced 2.76 cents to $1.6459 gallon while little changed for the week. February RBOB futures climbed 3.15 cents to $1.5660 gallon but eased 4.57 cents for the week.

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