WTI, Brent Rally Into Close on Outlook

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

CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced Thursday. West Texas Intermediate and Brent rallied to three-day highs in market on close trade following a bullish outlook by Goldman Sachs.

Oil futures also gained on a weaker U.S. dollar, which fell to near last week's three-year low in index trading despite a bullish reading on manufacturing and expectations for a roughly 25,000 person increase in job gains for January from month prior.

Wednesday's weekly supply report from the Energy Information Administration showing larger-than-expected drawdowns from gasoline and distillate fuel inventories amid a jump in implied demand also fueled Thursday's advance into settlement, with the contracts continuing higher late afternoon.

Goldman Sachs this morning hiked price expectations for Brent and WTI futures from month prior, lifting its three-month average forecast for Brent $13 bbl to $75 bbl and by $10.70 to $65.93 for WTI. The Wall Street investment bank said the global oil market probably reached a supply-demand balance, and expects a 200,000 bpd supply deficit for 2018.

The latest outlook from Goldman Sachs was joined by a Reuters' survey that found the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers achieved 138% compliance with their agreement reducing crude output by 1.8 million bpd in January, up 1% from December. The two-year agreement runs through 2018, and Saudi Arabia and Russia last month indicated they expected some form of the agreement to carry into 2019.

Production restraint by OPEC and their oil producing partners and the price outlook from Goldman Sachs overshadowed monthly data from EIA released Wednesday showing U.S. crude oil production topped 10.0 million bpd on a monthly basis in November 2017 for the first time since November 1970. At 10.038 million bpd, domestic production is near the record high of 10.044 million bpd. EIA projects U.S. crude oil production to average 10.27 million bpd this year, up 1.0 million bpd from 2017.

NYMEX March WTI futures settled up $1.07 at a $65.80 bbl three-day high, with April Brent on ICE ending up 76cts at a four-day spot high of $69.65 bbl following the March contract's expiration on Wednesday. Expectations for strong oil demand this year—EIA forecasts global oil consumption up 1.72 million bpd or 1.8% at 100.11 million bpd—and dollar weakness are seen underpinning oil futures in the short term. WTI and the dollar have an inverse relationship.

The Federal Open Market Committee on Wednesday unanimously agreed to hold the federal funds rate unchanged at 1.5%, which was widely expected. FOMC is still expected to raise interest rates three times this year, and noted a modest pickup in inflation, which should boost the currency. However, while the U.S. economy is expanding, so is world output, with the International Monetary Fund late last month indicating the dollar is probably overvalued by 10% despite an extended downturn. Domestically, the Institute of Supply Management's manufacturing index for January was 59.1, down 0.2 points from December although above consensus expectations for 58.6. It was the 17th consecutive month in which U.S. manufacturing has been in in expansion mode, underpinning strength for diesel fuel.

The dollar weakness also comes ahead of the Labor Department's nonfarm employment report due for release Friday morning, with a consensus estimate that 175,000 jobs were created in January following job growth of 148,000 in December. The national unemployment rate is expected to hold flat at a 4.1% 17-year low. On Wednesday, ADP reported private employment increased by 234,000 jobs in January, down from December's 242,000 job gains. ADP estimates have run well above the Labor Department's figures for more than a year. The strong employment picture supports gasoline demand.

Wednesday's EIA report lent credence to these data points, reporting total oil products implied demand at a 21.0 million bpd six-week high last week. Distillate demand surged 623,000 bpd on the week while up 13.3% over the four-week period ended Jan. 26 against year ago. Implied gasoline demand gained 348,000 bpd week-on-week, and is up 7.1% over the most recent four weeks compared with the comparable year-ago period.

NYMEX March ULSD futures settled up 2.4cts at $2.0904 on its first day as nearest delivery, with the six-month forward curve in backwardation. NYMEX March RBOB futures settled a fractional 0.21cts higher at $1.8958 gallon following an inside trade session, while the April contract gained on March delivery, up 0.9cts at $2.0736 gallon.

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

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Brian Milne