Oil Ends Higher Amid Mideast Clashes

CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery traded on the New York Mercantile Exchange and the front month Brent contract on the Intercontinental Exchange settled higher for a second straight session Friday. That erased Wednesday's steep losses, while down on the week after the market took profits following the price run up to the Nov. 30 meeting by the Organization of the Petroleum Exporting Countries and non-OPEC oil-producing partners.

There was a plethora of bullish data and geopolitical developments underpinning Friday's advance, overshadowing midweek concern that strong U.S. demand was stalling following inventory builds for gasoline and distillate fuel. A two rig gain this week in the number of oil rigs active in the United States briefly triggered selling after Baker Hughes announced its results early afternoon, with the oil service provider showing the U.S. oil rig count at 751, up 253 from year prior, and one so far during the fourth quarter.

Short covering ahead of the weekend amid heightened tensions in the Middle East following U.S. President Donald Trump's decision earlier this week to recognize Jerusalem as Israel's capital and putting in place the process to move the U.S. embassy from Tel Aviv to Jerusalem and the killing of Yemen's former president, Ali Abdullah Saleh, also boosted the oil complex. A week ago, Saleh ended his alliance with Houthi rebels that are supported by Iran in a war with Saudi Arabia, which is seen intensifying the conflict in Yemen. Yemen borders Saudi Arabia.

These events come ahead of Tuesday's (12/12) 60-day expiration for Congress to act, should it chose, to end U.S. participation in the Iranian nuclear accord reached during the Obama administration following Trump's decertification of the agreement in October.

The market's concern over potential oil supply disruptions from the Middle East is reflected by the $1.20 gain in ICE February Brent crude futures to $63.40 bbl that outpaced the 67cts advance by NYMEX January West Texas Intermediate to $57.36 bbl, widening Brent's premium to WTI to $6.04 bbl one-week high. On the week, Brent crude is down 33cts and WTI a $1.00 bbl lower.

NYMEX oil products futures also rallied, with supportive data on U.S. employment and consumer sentiment suggesting ongoing strength in domestic demand despite bearish supply builds reported midweek. It also follows news this week of expectations for strong trucking demand in 2018, with freight haulers placing large orders for new trucks on expectations for robust deliveries.

NYMEX January ULSD futures rallied 3.18cts in the session to a $1.9288 gallon settlement, while down 1.25cts on the week. ULSD futures traded at a $1.9617 gallon 30-month high on the spot continuation chart prior Friday.

NYMEX January RBOB futures settled up 1.66cts at $1.7166 gallon, while down 2.5cts on the week. Gasoline demand has surprised to the upside this year, although driving activity over the heavy Thanksgiving holiday disappointed the market.

A strong employment picture and growing economy are seen underpinning gasoline demand again next year. Early Friday, the Labor Department reported greater-than-expected job growth in November, with nonfarm payroll employment up 228,000 while the national unemployment rate held steady at a 4.1% 17-year low.

The data comes ahead of next week's Federal Open Market Committee meeting, with Fed officials widely expected to hike the federal funds rate, now at 1.0% to 1.25%, for the third time this year.

The U.S. dollar increased for the fifth consecutive session Friday to a two week high ahead of the Dec. 12-13 FOMC meeting, which may have limited the upside for WTI futures. Domestic crude prices and the dollar have an inverse relationship since oil trades globally in the greenback, although the relationship at times disconnects.

Also released earlier Friday, the University of Michigan's consumer sentiment index unexpectedly declined to 96.8 in December from November's 98.5 reading and October's 100.7 index.

"Consumer sentiment has remained quite favorable although it continued to slowly recede in early December from its October cyclical peak," said Richard Curtin, chief economist for the surveys. "Most of the recent decline was concentrated in the long-term prospects for the economy, while consumers thought current economic conditions have continued to improve. Importantly, the largest decline in long-term economic prospects was recorded among Democrats, which reflected their concerns about the impact of the proposed changes in taxes."

The market also rallied Friday on bullish data from China, showing gains in November in imports and exports and a widening trade surplus by the world's second largest economy. Included in the data was a spike in crude oil imports by China to 9.01 million bpd, which Reuters notes is the second largest monthly rate of crude imports on record for China.

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

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