Oil Futures Slip Friday

CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery traded on the New York Mercantile Exchange and front month Brent crude on the Intercontinental Exchange declined at settlement Friday following a nine-rig jump in active oil rigs in the United States that erased the prior week's eight-rig decline.

The closely watched rig count report from oil services provider Baker Hughes released at 1 p.m. EST showed the number of active oil rigs in the United States at a 738 one-month high through today, eliciting concern that shale oil producers would rapidly ramp up domestic oil production with oil prices now over $50 bbl. Ongoing deployment of rigs into the U.S. oil patch would reverse a downtrend in the rig count since mid-August when it reached a 768 28-month high, and raise concern that higher U.S. production would re-inflate a supply overhang that was being drained.

The Baker Hughes report follows data released Wednesday by the Energy Information Administration that reported a 67,000 bpd increase in U.S. oil production to a 9.62 million bpd 2-1/2 year high during the week ended Nov. 3. EIA in its Short-term Energy Outlook released Tuesday expects steady gains in U.S. oil production, with domestic output projected at 9.9 million bpd in 2018.

Climbing U.S. production would mitigate efforts by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries to drawdown global oil supply with their production cut agreement. OPEC and their partners reached a supply pact nearly a year ago that took effect Jan. 1 and reduces their oil production by 1.8 million bpd. The agreement was extend through March 2018 and is widely expected to again be extended through all of 2018.

Ahead of the rig data, oil futures were trading shallowly mixed, consolidating within the week's trade range, which included upside breakouts for crude and ULSD futures, while the RBOB contract reached its highest point since July 2015 when omitting the Aug. 31 price spike triggered by a Hurricane Harvey sparked short squeeze at expiration. ULSD futures registered a better than 29-month high at $1.9563 gallon Friday on a cold weather blast into the U.S. Northeast -- the world's greatest concentration of households and small businesses that use heating oil for their space heating requirements.

While down on the session, crude and ULSD futures rallied 2.0% or more since prior Friday with the RBOB contract up 1.1% following a dramatic and pivotal week in geopolitics that heightened the risk of military confrontation between Saudi Arabia and Iran.

Over the weekend and through this week, Saudi Arabia's Crown Prince Mohammed bin Salman has taken aim at political rivals within the kingdom as the heir apparent to the throne consolidates power amid his ambitious push at social and economic reforms, jailing scores of princes and government officials and confiscating hundreds of billions of dollars amid an anticorruption crackdown.

The crown prince is also taking action to thwart Iran's growing influence in the Middle East, with Saudi Arabia and Iran battling through their proxies in Yemen and Syria. Iran supported rebels in Yemen, the Houthis, fired a missile at the Saudi capital of Riyadh during the past weekend, which was shot down by Saudi Arabia.

Most recently, Saudi Arabia has barred its citizens from traveling to Lebanon, and ordered all Saudi nationals in Lebanon to leave immediately.

"The tensions are rising after the Lebanese Prime Minister Saad Hariri resigned in Saudi Arabia but is now currently missing and his party the "Future Movement" is saying that Saudi Arabia is holding him against his will," said Chicago-based Phil Flynn, senior market analyst with The PRICE Futures Group.

Saad Hariri said this week while in Saudi Arabia that he fled Lebanon out of fear for his life.

Analysts indicate Iran runs Lebanon's politics and Hezbollah now runs the military, outnumbering Lebanon's army. Hezbollah is a terrorist organization backed by Iran.

The initial concern for oil disruptions in the region are seen as low. However, events are unfolding quickly that could affect the region's crude production or flow of oil from the Middle East.

A continent and ocean away, oil production from another OPEC member, Venezuela, has been on a steady decline amid mismanagement and a lack of funds.

On Thursday, the United States imposed new sanctions on 10 Venezuelan officials related to elections over the summer that were widely viewed as undemocratic. The latest round of sanctions, with the U.S. imposing sanctions on Venezuelan President Nicolas Maduro following the elections, further complicate the OPEC member's ability to restructure its debt as the increasingly authoritarian government faces default on billions of borrowed dollars.

Amid heightened geopolitical tensions, the global oil market has been tightening following three years of oversupply due to the OPEC, non-OPEC production agreement and stronger-than-expected demand.

Better than expected economic growth in the United States is joined by expanding economies across much of the world, driving demand for oil higher. In the latest footnote on demand, on Thursday the European Union revised expected growth for the 19-member eurozone for this year from 1.7% to 2.2%, with annualized economic growth for the 28-member European Union adjusted up 0.4% to 2.3%.

At settlement, NYMEX December West Texas Intermediate were down 43cts at $56.74 bbl while $1.10 higher on the week, trading at a $57.92 bbl 28-month high on the spot continuous chart on Wednesday. ICE January Brent futures settled down 41cts at $63.52 bbl while $1.45 higher since prior Friday, and traded at a better than 28-month spot high of $64.65 on Tuesday.

Brent's premium over WTI settled at $6.78 bbl today after reaching a 2-1/2 year high on Oct. 31 at $6.99 bbl. Brent's premium has been over $6 bbl since Oct. 25 as global oil inventories decline amid the OPEC, non-OPEC production cuts and strong demand, while oil held at Cushing, Oklahoma, the delivery location for WTI futures, continues to build. EIA reported Cushing stocks at a nearly six-month high at 64.6 million bbl as of Nov. 3, representing 83.8% of working storage capacity.

The wide discount for WTI has boosted U.S. crude exports, which reached a record high in late October at 2.133 million bpd.

NYMEX November ULSD futures settled down 1.2cts at $1.9349 gallon while up 4.83cts on the week, with November RBOB futures ending down 0.73cts at $1.8124 gallon while 1.9cts higher than prior Friday.

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