Oil Futures Reverse to End Higher

Oil Futures Reverse to End Higher

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange settled higher Friday after reversing off support following Thursday's selloff, boosted by short-covering ahead of the three-day Memorial Day holiday weekend and unofficial start to the summer driving season.

Friday's advance pared weekly losses plumbed Thursday in reaction to the market's disappointment with the Organization of the Petroleum Exporting Countries and their non-OPEC allies' decision to extend current production cuts of nearly 1.8 million bpd for nine months through the end of the first quarter 2018, which had been widely telegraphed ahead of Thursday's biannual meeting in Vienna.

The market was looking for deeper production cuts after news reports over the past several days circulated comments from oil ministers that OPEC was seeking cooperation from Egypt and Turkmenistan in reducing world oil production among other measures under consideration.

"It's been months of the same headlines, and while the decreased supply from OPEC certainly helps support crude prices worldwide, the market is being kept suppressed by western supplies. The EIA status report was brushed off and the market seems to have been anticipating a more aggressive plan from OPEC, after both news events have now resulted in the biggest price decline since mid-March," said Dan Hussey, senior market strategist with RJO Futures.

Oil futures had rallied to better than one-month highs leading up to Thursday's meeting after the Energy Information Administration reported Wednesday a larger-than-expected 4.4 million bbl draw in U.S. crude supply for the week-ended May 19, and in anticipation OPEC would surprise the market with deeper cuts to counteract climbing U.S. crude oil production.

U.S. shale oil producers continue to frustrate global oil producers after upending the global oil market three years earlier, employing technological advances to produce oil from fields previously passed over that spurred the current oversupplied market.

In response to low oil prices, OPEC courted 11 non-OPEC oil producing countries including Russia to agree to the current steep production cuts in late 2016. Crude oil prices rallied on the agreement, and later on strong compliance in following through on the agreement.

As crude prices topped $50 bbl, shale oil producers began returning rigs to the fields and pumping ever greater volume. Moreover, drillers hedged heavily during the price upturn, and can continue to make money even with a price downturn.

Since OPEC's Nov. 30, 2016 six-month agreement through June 30, drillers in the United States have added 248 rigs to the oil field to lift the number of active rigs to a better than two-year high at 722, according to Baker Hughes, Inc., including two more deployed this week. The EIA midweek reported U.S. crude production averaged 9.32 million bpd during the week ended May 19--the highest domestic output rate since August 2015, while up 623,000 bpd since the OPEC agreement was reached.

OPEC, which now has 14 country members after Equatorial Guinea joined the cartel on Thursday, contends the nine-month extension and growing demand will draw global oil inventory down to their five-year average, the cartel's goal.

The west African nation of Equatorial Guinea was one of the 11 non-OPEC oil producers in alliance with OPEC in cutting production.

NYMEX July West Texas Intermediate futures settled up 90cts at $49.80 bbl after testing support at $48.15, the 38.2% retracement point for the downtrend from the January high of $55.24 to the May low of $43.76, with a $48.18 one-week low. The spot-month contract, which traded at a $52.00 six-week high Thursday, edged down 53cts on the week.

Although settling up 69cts at $52.15, July Brent futures on the IntercontinentalExchange erased $1.46 of its value this week and ahead of the July contract's expiration on May 31. Spot-month Brent crude had rallied to a $54.67 six-week high Thursday before reversing down to test support at $50.46, the 38.2% retracement point for the selloff from the $56.65 April high to the $46.64 May low, with a $50.71 two-week low. August Brent crude futures settled up 74cts at $52.51 bbl while down $1.25 from prior Friday.

NYMEX June RBOB futures settled up 3.33cts at $1.6426 gallon while down 0.97cts on the week ahead of the June contract's expiration on May 31, trading at a $1.6750 gallon six-week high on the spot continuous chart on Wednesday. July RBOB futures settled up 2.42cts at $1.6261 gallon while down 2.17cts from prior Friday, with the market's seasonal backwardation widening this week.

NYMEX June ULSD futures settled 1.24cts higher at $1.5633 gallon, with the spot-month contract reversing higher after testing support at $1.5237, the 38.2% retracement point for the downtrend from the $1.7647 January high to the May low of $1.3748, with a $1.5300 one-week low. The June contract had rallied to a $1.6269 six-week high on the spot continuous chart Thursday before the selloff. June ULSD futures settled down 1.94cts on the week, and ahead of its expiration on May 31. July ULSD futures settled up 1.18cts at $1.5670 gallon, while down 3.14cts from prior Friday.

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

(BAS)

Brian Milne