Oil Settles Higher on Bullish Outlook

NEW YORK (DTN) -- New York Mercantile Exchange spot-month oil futures settled sharply higher Tuesday after the combination of a weaker dollar, expectation for weekly U.S. crude supply draw, an upward revision in world economic growth and the prospect of extended production cuts by the Organization of the Petroleum Exporting Countries and their non-OPEC partners spurred a rally.

"The Russian and Saudi comments that they'd like to keep OPEC and non-OPEC production curbed is, to me, the most important factor driving this market," said Tim Bentz, vice president for energy derivatives at ABN AMRO.

Khalid al-Falih, the energy minister for Saudi Arabia, and Russian counterpart Alexander Novak on Sunday said they were ready to extend the current 1.8 million bpd in production cuts by OPEC and 10 non-OPEC producers into 2019 rather than allow the agreement to expire at the end of this year as currently scheduled. The supply agreement took effect on Jan. 1, 2017. On Monday, OPEC said they achieved a 107% compliance rate with the agreement for all of 2017.

The comments from al-Falih and Novak were unexpected, and came at a time the market was thought to be rebalancing, said Bentz. The International Energy Agency last week said the global oil market would rebalance this year if OPEC and non-OPEC producers fully comply with their production agreement. The IEA sees a modest surplus in the first half of 2018 and a modest deficit during the second half despite a projection for sharply higher output by non-OPEC producers that are not party to the supply agreement, namely the United States.

On Monday, the International Monetary Fund upwardly revised its global economic growth forecast, which implies greater demand for oil, adding to the bullish sentiment Tuesday.

The IMF upped its forecast for world economic growth by 0.2% to 3.9% for both 2018 and 2019, saying the recent $1.5 trillion tax overhaul in the United States is likely to boost investment. The U.S. economy is seen growing at a 2.7% annualized rate in 2018 and 2.5% in 2019, said the IMF, higher than the 2.3% growth rate forecast in October. The rally comes ahead of data that will show changes to supply levels for the week-ended Jan. 19 to be released at 4:30 PM ET by the American Petroleum Institute with the Energy Information Administration's data series set for release at 10:30 AM ET Wednesday.

A survey earlier today estimates U.S. crude oil stockpiles were drawn down during the week-ended Jan. 19 by 3.25 million bbl, with distillate stocks expected to have decreased by 1.75 million bbl, and gasoline inventories to have increased by 2.25 million bbl.

The expected crude stock draw would be the 10th straight if realized. Analysts expect domestic crude stocks to again decline because of strong refiner demand and reduced crude flow from Canada, with TransCanada's Keystone pipeline still operating at a reduced rate after a leak was detected on Nov. 16, 2017 in South Dakota.

On Thursday (1/18), EIA reported commercial crude supply in the United States at 412.7 million bbl as of Jan. 12, 72.8 million bbl or 15.0% below a year ago.

NYMEX March West Texas Intermediate crude oil futures settled 90cts higher at $64.47 bbl, near a one-week spot high of $64.88. March Brent crude on the Intercontinental Exchange climbed 93cts to a $69.96 bbl settlement after briefly topping $70 bbl with a $70.24 intraday high. NYMEX February ULSD futures advanced 2.92cts to $2.0861 gallon, edging off a one-week high of $2.0903. February RBOB futures rallied 2.86cts to a $1.9087 gallon settlement, moving off a $1.9150 four-month, three-week spot high.

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