Oil Futures Rally on Libyan Outage

NEW YORK (DTN) -- Spot-month oil futures on the New York Mercantile Exchange settled sharply higher Tuesday with ULSD and crude oil futures at 2-1/2-year highs triggered by a pipeline explosion in Libya and further fueled by technical support, strong demand expectations for distillate fuel amid severe cold weather in the U.S. Northeast, an ongoing pipeline outage in the North Sea, and steep inventory drawdowns in the United States in December.

"West Texas Intermediate crude finally broke above $60, which is technically supportive, and the catalyst was the terrorist attack on Libyan pipeline," said analyst Phil Flynn at Price Futures.

Libya's National Oil Corp. reported an explosion at an oil pipeline running to the Es Sider export terminal, shutting anywhere between 70,000 and 100,000 barrels per day (bpd) of supply that often goes to Europe. The explosion occurred on the Al-Zouk line that connects the Es Sider terminal to a 260,000 bpd oilfield in the Mouradah basin jointly operated by NOC and U.S. majors ConocoPhillips, Marathon Oil and Hess.

"The Libyan outage is going to tighten the European market that was already tighter due to the Forties pipeline shutdown," said Flynn.

The 450,000-bpd Forties crude pipeline system in the North Sea has been shut since Dec. 11 with expectations for a restart in early January. The outages add to the ongoing curbs to oil output by the Organization of the Petroleum Exporting Countries and 10 non-OPEC producers.

At 122%, OPEC said late last week they achieved their highest rate of compliance with production quotas since the agreement took effect in January. The 1.8 million bpd in output cuts by OPEC and 10 non-OPEC producers is set to run through December 2018.

ULSD futures spiked on weather forecasts for the next 10 days that show an arctic blast bringing near record cold weather into the U.S. Northeast region through the end of December and into 2018, boosting demand in the world's biggest heating oil market.

"In truth, even without the Libyan pipeline explosion, the market was going to be up because of cold temperatures," added Flynn. "And so this is also a story of demand… we have a strong economy that supports demand and that will run down inventories in 2018."

Data issued last week by from the Energy Information Administration showed domestic crude oil stockpiles have fallen by a combined 11.6 million barrels (bbl) during the two weeks ended Dec. 15. At 436.5 million bbl, total crude stocks are nearly 49.0 million bbl, or 10.1%, lower than a supply on-hand a year ago.

The report showed total products supplied over the last four-week period averaged 20.3 million bpd, up by 2.6% from a year earlier. Gasoline demand for the week-ended Dec. 15 was up 335,000 bpd on the week to 9.426 million bpd.

NYMEX February WTI crude futures settled $1.50 higher at $59.97 bbl, pennies off a 30-month spot high of $60.01, cracking through resistance at $59.05. ICE February Brent crude futures soared $1.77 to a $67.02 bbl settlement, off a $67.10 31-month spot high. In arbitrage trade, the Brent premium to WTI rose to a $7.05 bbl 2-1/2 year high.

NYMEX January ULSD futures spiked 6.91 cents to a $2.0385 gallon settlement, edging off a fresh 2-1/2-year spot high of $2.0410 after plowing through the recent high at $1.9812. January RBOB futures settled 2.43 cents higher at $1.7866 gallon.

George Orwel can be reached at george.orwel@dtn.com