Oil Futures End at 2-Week Highs

CRANBURY, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled at two-week highs. This was due to bullish data from China and another weekly slowdown in drilling activity in the United States, joined by heightened geopolitical risk after U.S. President Donald Trump decertified a nuclear deal with Iran and Kurdish fighters were deployed to the Kirkuk oilfield in Iraq.

Oil futures rallied out of the gate for the week's final trade session on data from China showing oil imports spiked 11.9% year-on-year in September to 9.04 million bpd, which Barclays notes is the second highest import rate on record for the country. The surge in imports followed a 3.4% annual increase in August that had prompted concern that strong oil demand growth in China earlier in the year had fizzled.

"The rebound in imports can most likely be attributed to the recent startup of CNOOC's Huizhou refinery Phase 2 project, which includes a 10 mtpa oil processing capacity, and a return of some independent refiners from maintenance cycle," said Barclays in a research note.

The data also showed a decline in China's oil products exports and the fourth monthly year-on-year increase in products imports that Barclays suggests is due to stronger domestic oil consumption.

"We recently revised our full-year average total products demand growth estimate for China to 0.62 mb/d y/y, up from 0.56 mb/d y/y, primarily because of a higher distillates demand growth estimate," said Barclays. Glencore, according to media reports, expects oil demand for China to remain strong in 2018, with the trade house indicating the country is set to add 100 million bbl of crude oil to its strategic petroleum reserve next year.

Oil futures settled lower Thursday due chiefly to expectations by the International Energy Agency that oil price gains would be capped in 2018 as production is expected to outstrip demand in the first quarter by as much as 800,000 bpd. The IEA outlook overshadowed weekly data from the Energy Information Administration that showed an 81,000 bpd decline in U.S. oil production during the first week of October from a 27-month high to a 9.48 million bpd one-month low.

A slowdown in U.S. oil production had been a factor in boosting oil prices in closing out the third quarter and into the fourth quarter amid a viewpoint that drillers were becoming more disciplined, as investors were demanding a return on their investment. That view was supported by data out this afternoon from Baker Hughes, Inc. that showed the number of active oilrigs in the United States declined this week to a four-month low at 743. The five-rig decline marked the fifth week out of the past six in which oil rigs in operation declined.

Oil futures also rallied on increased geopolitical risk, with U.S. President Trump this afternoon decertifying a nuclear accord with Iran reached by the Obama administration in 2015, and blasted Iran's leadership for financing terrorists, fomenting civil wars in the Middle East, and imprisoning Americans.

The agreement required certification from the president every 90 days, but after two certifications Trump, who had lambasted the agreement during his campaign seeking the presidency, has disavowed the accord which sends it to Congress. Congress could decide to re-impose sanctions on Iran, which would kill the agreement.

Trump's actions came as tension in northern Iraq is heating up following the Sept. 25 vote for independence by the Kurds, which the Iraqi government has denounced. Reports indicate thousands of Kurdish troops were deployed to the Kirkuk oilfield after the Iraqi government mobilized troops and tanks south of the city. The troop movement heightens the risk of civil war in Iraq.

The region in northern Iraq that the Kurds declare their own produces about 600,000 bpd of oil, and is seen as a critical source of revenue for a Kurdish government. In late September, crude futures surged after Turkey threatened to close the 500,000 bpd pipeline that carries oil from northern Iraq to the Turkish port of Ceyhan, where it is then exported.

At settlement, NYMEX November West Texas Intermediate futures were up 85cts at $51.45 bbl, the highest settlement in October, with the contract rallying $2.16 or 4.4% on the week. ICE December Brent crude futures settled up 92cts at $57.17 bbl and gained $1.55 or 2.8% from prior Friday.

NYMEX November ULSD futures rallied 3.15cts to $1.7970 gallon, while up 5.31cts of 3.0% on the week. NYMEX November RBOB futures shot up 3.9cts to $1.6222 gallon while rallying 6.34cts or 4.1% from prior Friday.

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

(BAS)

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