Oil Futures Spike Higher Amid Rig Drop

CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery, traded on the New York Mercantile Exchange, and the front month Brent crude futures contract, traded on the Intercontinental Exchange, rallied into the week's closing bell Friday, with West Texas Intermediate and Brent futures exploding to 28-month highs after flat trading as the market's bullish sentiment was fed another dose of supportive data.

NYMEX November RBOB futures continues to surprise to the upside with a contra-seasonal move to a fresh better-than two-month high, while November ULSD futures snapped a two-day data driven decline with a 1.8% jump in value Friday.

WTI futures settled above $55 bbl for the first time since early July 2015, with the rally following an eight rig decline in the number of active oil rigs in the United States for the week ended Friday that lowered the active U.S. oil rig count to a better-than five-month low at 729, according to Baker Hughes, Inc. The number of active oil rigs has now fallen in seven out of the past nine weeks for a 30-rig net decline.

The rig decline brushed aside concern, if even only temporarily, that shale oil producers in the United States would race back into the fields to deploy new rigs now that WTI futures are above $50 bbl, which is considered the breakeven price point for many wells. Several oil producers and analysts have said in recent weeks that cost cutting and new pipeline capacity have lowered the breakeven point below $50 bbl.

The worry over a rapid hike in U.S. crude production was seen as part of the reason the upside for WTI futures were capped since Wednesday when the Energy Information Administration reported domestic output increased 46,000 bpd to 9.553 million bpd during the week ended Oct. 27. The EIA forecasts U.S. oil production would reach a record high above 10.0 million bpd in late 2018, while some industry followers believe crossing the 10.0 million bpd mark will take place early next year.

WTI futures were also lent upside price support after the EIA on Wednesday reported a record rate of U.S. crude exports at 2.133 million bpd during the final full week of October. A widening discount for WTI futures against Brent has incentivized foreign buyers of oil to source U.S. supply. WTI's discount to Brent settled at $6.43 bbl Friday, holding below Tuesday's (10/31) $6.99 2-1/2 year low.

The WTI-Brent spread has widened since late August, when Hurricane Harvey wreaked havoc upon the heart of the country's refining center along the Gulf Coast that was seen limiting demand for domestic crude.

The strength in Brent's premium is also fostered by tightening global oil supply amid 1.8 million bpd in production cuts by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries including Russia that took effect Jan. 1. The supply pact, set to expire at the end of the first quarter 2018, is widely expected to be extended through the end of 2018.

OPEC will meet in Vienna on Nov. 30 where it will host its non-OPEC partners to discuss the market and the effect of the production agreement. Compliance with the agreement has been robust, which surprised many considering OPEC's spotty consistency in following its agreements.

Evidence that the global oil market is tightening following a protracted three-year glut continues to mount, with global inventories including floating storage trending down since June. The outlook by some analysts now is that the market will be tight in late 2018. While the supply cuts have been a critical component in narrowing the supply-demand balance, unexpectedly strong global oil demand, especially in the United States, has also worked in clearing inventory and bolstering prices.

Gasoline demand has been strong in the United States, catching up with the 2016 pace in October. During the four weeks ended Oct. 27, EIA reported implied gasoline demand at 9.348 million bpd, up 257,000 bpd or 2.8% against the comparable year-ago period. Strong demand has helped in working gasoline inventory down, which fell 9.5 million bbl during the two-week period ended prior Friday to a 212.8 million bbl 26-month low.

The market's bullish psychology is also found in positions held by noncommercial traders, with the speculator group adding to net-long positions in the three NYMEX oil futures contracts through Tuesday (10/31), data from the Commodity futures Trading Commission released this afternoon shows. CFTC's Commitment of Traders' report shows speculators added to a net-long WTI position for the fourth consecutive week, and for a third straight week for RBOB futures, while moving to a five-week net-long high in ULSD futures.

A robust U.S. economy joined by strong economies elsewhere in the world and ongoing job gains in the United States, where the national unemployment rate fell to a nearly 17-year low at 4.1% in November, a high level of consumer spending including auto sales and consumer confidence at a 17-year high all add to the bullish story for oil prices. A growing economy uses more fuel.

At settlement, NYMEX December WTI futures were up $1.10 at $55.64 bbl, accounting for most of the week's $1.74 bbl advance. It's too soon to determine whether the settlement above $55 bbl is the upside breakout long pined for by some market followers, although the golden cross on the spot continuation chart marked in late October implies upside potential. (A golden cross occurs when the 50 day moving average moves sharply higher and crosses the 200-day moving average, which took place on Oct. 23).

ICE January Brent crude futures settled above $60 bbl for the sixth consecutive session, rallying a $1.45 to $62.07 bbl Friday. On a spot month basis, the contract gained $1.63 on the week with December Brent expiring at Tuesday's close.

NYMEX December ULSD futures was pulled higher by the Brent futures rally, with the contract under pressure since Wednesday's EIA report which showed a much smaller-than-expected draw in nationwide inventory and drop in implied demand. Ahead of the midweek statistics, ULSD futures had rallied to a $1.9030 gallon better-than 28-month high on the spot continuation chart. Friday, the contract settled up 3.27cts at $1.8866 gallon, while on the spot chart is up 1.97cts since prior Friday.

NYMEX November RBOB futures traded at the second highest price point on the spot continuation chart Friday at $1.7998 gallon, holding below the Hurricane Harvey caused short-squeeze expiration spike on Aug. 31 at $2.1705 gallon. At settlement, November RBOB futures were up 2.37cts at $1.7934 gallon and gained 2.48cts on the week on a spot month basis. The November oil products futures contracts expired at Tuesday's close.

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

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