Oil Extends its Rally Friday

NEW YORK (DTN) -- New York Mercantile Exchange oil futures rallied at the start of regular trade Friday morning amid tightening global supply and strong demand for U.S. products, and ahead of a U.S. rig-count report that will show if domestic drilling for oil continued to increase this week.

Fresh evidence in support of the market's bullish outlook on global fundamentals was released this morning by the International Energy Agency, with the Paris-based agency indicating in their monthly Oil Market Report that crude oil production by the Organization of the Petroleum Exporting Countries fell 1.0 million bpd to 32.06 million bpd in January for a record initial compliance rate of 90% with their output agreement.

"This is a very bullish report," said senior analyst Phil Flynn at Price Futures Group. "They raised demand forecast and confirmed what we knew about OPEC compliance with the cuts being the best ever, and IEA has credibility."

This report came a day after some OPEC members suggested an extension of the group's production cuts for another six more months after the current agreed to terms end on June 30.

IEA's assessment of OPEC compliance with their agreement was elaborated further in an accompanying report entitled "The First Cut is the Deepest" that said "[IEA] sees an apparently solid start to agreed production cuts by members of OPEC and eleven non-OPEC countries, as well as interest in the expected recovery in U.S. light, tight, oil production."

Paris-based IEA said global oil supplies dropped nearly 1.5 million bpd to 96.4 million bpd in January, with lower output from both OPEC and non-OPEC producing countries. World oil production was down 730,000 bpd in January against year prior.

After declining year-on-year by 800,000 bpd in 2016, non-OPEC oil production is expected to grow 400,000 bpd this year, driven by rising output in the Americas.

Inventory from the 34-country members that are part of the Organization of Economic Cooperation and Development was drawn down five consecutive months in ending 2016, and in the fourth quarter declined by nearly 800,000 bpd, with inventory ending the year below 3.0 billion bbl for the first time since December 2015, IEA said.

IEA revised higher its estimate for world oil demand for 2016 for the third straight month due to robust demand in the fourth quarter, while estimating global oil consumption at 96.6 million bpd last year for a year-on-year growth rate of 1.6 million bpd.

In early trade, NYMEX March RBOB futures were 3.28cts higher at $1.6030 gallon, off a $1.6134 three-week spot high, while NYMEX March ULSD futures gained 2.79cts to $1.6694 gallon, near a $1.6758 four-day high.

NYMEX March West Texas Intermediate futures rose 85cts to $53.85 bbl, near a $54.05 four-day high, while ICE April Brent crude oil futures gained 91cts to $56.54 bbl after trading at a $56.76 four-day high.

Even before the IEA report this morning, the oil future market was supported by bullish products data issued midweek by the U.S. Energy Information Administration. The EIA report for the week-ended Feb. 3 detailed a 7.6% spike in gasoline demand to a 8.941 million bpd six-week high, while distillate demand rose 101,000 bpd to a 3.91 million bpd two-week high. Distillates demand through Feb. 3 is 324,000 bpd or 9.4% higher than during the comparable year-ago period.

The rig-count report for the week-ended today will be released at 1:00 PM ET by oil services firm Baker Hughes, Inc. The report for last week showed an increase of 17 rigs drilling for oil in the United States.

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