Oil Futures Spike on Saudi Purge

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

CRANBURY, N.J. (DTN) -- Oil futures traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange surged Monday following news that Saudi Arabian King Salman arrested dozens of princes, ministers and prominent businessman over the weekend following a two-year corruption probe, with reports indicating additional arrests are likely.

The arrests are, however, seen as King Salman consolidating power ahead of his expected abdication of the throne either this year or in early 2018 when he will install his 32-year old son, Crown Prince Mohammed bin Salman, as the next king. The Crown Prince has leapfrogged his cousins under his father's rule, and been given enormous powers in running the government, including its economy.

Mohammed bin Salman is the force behind the expected IPO for a share of Saudi Aramco which has been valued at more than $1 trillion, with the revenue to be used to diversify the Saudi economy. The Crown Prince expressed this direction more than a year ago in his Vision 2030, with a goal of ending the country's dependence on oil revenue.

The purge comes amid heightened tension in the greater Middle East, with Iraq in October reasserting Baghdad's control over oilfields in the north briefly claimed by the Kurdish Peshmerga. The news also follows U.S. President Donald Trump's decertification of the Iranian nuclear accord last month, with Iran and Saudi Arabia fighting a proxy war in Yemen. On Sunday, Saudi Prince Mansour bin Muqrin and several government officials were killed in a helicopter crash near the Yemen border, with the prince an adversary of Crown Prince Mohammed bin Salman.

The news comes ahead of a meeting by the Organization of the Petroleum Exporting Countries in Vienna on Nov. 30 to review market conditions and the effect of their production agreement joined by 10 non-OPEC oil producing countries. The 1.8 million bpd in production cuts that took effect Jan. 1 runs through the end of March 2018, and is widely expected to be extended through the end of 2018. Crown Prince Mohammed bin Salman has given his support for the extension, as has Russian Prime Minister Vladimir Putin. Russia is not part of OPEC.

Today's price spike was grown from fertile ground, with oil futures already trading near better than two-year highs amid a tightening oil market due, in large part, to strong compliance by OPEC with their production agreement. Many analysts had minimized the effect of the supply pact given the checkered history OPEC has in following through with its agreements, with the strong performance driven by Saudi Arabia.

Additionally, OPEC member Venezuela continues to experience lower production and has had cargoes go unsold due to poor quality which is seen growing worse as the South American country faces default on billions of dollars of debt. In Nigeria, militants said they are ending a self-imposed ceasefire against the government, with the militants having previously targeted the country's oil infrastructure, while production in Libya is seen capped below 1.0 million bpd. Both Nigeria and Libya are members of OPEC, but exempt from the OPEC production agreement.

The global oil market has also tightened with stronger-than-expected global oil demand.

U.S. "[p]roduct demand, most recently at 19.2 million barrels daily has been at an elevated state for over a year, despite many bearish projections," said Alan Levine, chairman of Powerhouse, Washington, D.C.-based broker house.

Strong demand should continue, with the U.S. economy growing at an annual rate at or above 3% for two consecutive quarters through the end of September and despite the effects of major hurricanes, while in October the national unemployment rate sunk to a 4.1% 17-year low. Manufacturing activity continues to expand in the United States, and consumers are spending more with consumer confidence at a 17-year high.

"A general pattern of declining U.S. inventories, growth of exports and recovery of refining assets have become principal drivers of domestic price," said Levine.

NYMEX December WTI futures surged $1.71 to settle at $57.35 bbl, decisively breaking out of its long-term range between $42 and $55 bbl. WTI settled near a $57.61 fresh 28-month high on the spot continuation chart, with the previous high registered on July 2, 2015 at $57.95 bbl. WTI futures face resistance at $58.32 bbl, with the spot month contract rallying $4.88 bbl since the formation of a golden cross on the charts, which occurs when the 50-day moving average vigorously crosses the 200-day moving average.

ICE January Brent futures settled near a $64.44 bbl nearly 29-month high on the spot continuation chart at $64.27 bbl, up $2.20. Brent faces retracement resistance at $65.80 bbl.

The Brent contract widened its premium to WTI to $6.92 bbl, just below last week's 2-1/2 year high at $6.99 bbl. The wide Brent-WTI spread has encouraged crude exports from the United States, which reached a record high in late October at 2.133 million bpd, according to data from the Energy Information Administration.

NYMEX December ULSD futures settled up 5.56cts at $1.9422 gallon, and near a $1.9468 gallon 29-month high on the spot chart. ULSD futures has a cluster of resistance in the mid $1.90s, and again at $2.0032 gallon.

NYMEX December RBOB futures settled up 3.66cts at $1.83 gallon, trimming an advance to a $1.8390 gallon better-than two month spot high. The previous high was reached on Aug. 31 at $2.1705 gallon when Hurricane Harvey had laid siege to the Gulf Coast refining center.

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

(BAS)

Brian Milne