Oil Futures Rally Into Close

CRANBURY, N.J. (DTN) -- Oil futures nearest to delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied throughout the session and into the close, settling near intraday highs amid an early but fleeting rally in equities and on the reported chemical attack in Syria that U.S. President Donald Trump said "can't be allowed to happen."

In the still young second quarter, oil futures have been whipsawed by concern a trade war could erupt between the United States and China and threaten global economic growth and oil demand, and ongoing gains in U.S. oil production that haves been countered by production cuts by the Organization of the Petroleum Exporting Countries. In starting the second week of the second quarter, geopolitical tension has ratcheted higher following reports that 49 people in the city of Douma, Syria, were killed on Saturday by a chemical weapon, with many of the dead women and children. Syria denied the attack, and Russia called the event a "hoax."

Russia and Iran are allies of Syria in the years-long bloody conflict, while the United States has Special Forces in the country aiding Syrian rebels. Israel, which shares a border in the northeast with Syria, reportedly launched airstrikes against Syrian targets today.

During a press briefing at the White House, Trump condemned the attack, and said his administration would make a decision on how to respond to Syria within the next 24 to 48 hours, according to BuzzFeed News.

"If it's the Russians, if it's Syria, if it's Iran, if it's all of them together, we'll figure it out," said Trump.

The bombing with outlawed chemicals may have radically changed events in the Syrian conflict, with Trump last week indicating his desire to pull U.S. troops out of the war-torn country that coincided with sharp advances by Syrian forces against the rebels. The bombing also came on the heels of new sanctions on Russia that targeted their oligarchs, sending Russian markets tumbling.

While Syria is a modest oil producer, oil supply security in the region could be at risk. The chemical bombing also comes ahead of a May 12 deadline Trump gave for major changes to be made to the nuclear accord with Iran reached in 2015 by the Obama administration. Without substantial changes to the agreement, Trump said he would not certify that Iran has been in compliance with the accord that would re-impose sanctions on Iran. Analysts estimate sanctions against Iran could cut the Islamic regime's oil exports that have averaged near 3.8 million bpd by 350,000 bpd.

Separately, OPEC has maintained strong discipline with its 1.2 million bpd in production cuts against their October 2016 output rate, with the two-year agreement running through the end of this year. Russia and nine non-OPEC oil producing countries are in alliance with the OPEC agreement, cutting nearly 600,000 bpd.

In March, OPEC oil production declined by 90,000 bpd to 32.19 million bpd, an 11-month low, led lower by output declines in Angola, Libya and Venezuela.

"These shortfalls explained the reduced level of output but it should be noted that lower output was not because of a conscious effort to comply. Rather they contributed to the lower level of supply because of challenges not overcome. Angola's shortfall reflected natural decline and Venezuela's drop reflected an economic crisis of massive proportions," said Alan Levine, chairman of Washington, D.C.-based brokerage Powerhouse.

Oil futures also rallied with equities, with major U.S. equity indices up sharply Monday, although their advance on the session was pared sharply late afternoon. The Dow Jones Industrial Average was up nearly 50 points, the S&P 500 Index gained 9 points with the NASDAQ Composite climbing more than 35 points. The U.S. dollar softened on the session.

Oil futures have largely moved in tandem with equities thus far in the second quarter, as a trade dispute between the United States and China has sparked sharp whipsaw reversals in daily trading. Both countries have announced imports tariffs against the other, sparked in March by Trump's decision to impose tariffs on imported steel and aluminum.

While Trump's trade adviser called the tariffs a wakeup call highlighting an unfair trade advantage that China has in U.S.-China trade, other White House officials looked to downplay the threat for a trade war. They indicate that Trump wants to negotiate an agreement with China that is fair for the United States. China held a $375 billion trade advantage to the United States in 2017, according to the Wall Street Journal.

NYMEX West Texas Intermediate settled up a sharp $1.38 at $63.42 bbl, while holding to inside trade, highlighting the market's recent volatility. ICE June Brent crude futures settled up $1.54 at $68.65 bbl, with Brent's premium to WTI widening to a $5.23 bbl one-week high.

NYMEX May ULSD futures rallied 3.88cts to settle at a $1.9966 gallon, ending near a $2.0034 gallon one-week spot high.

NYMEX May RBOB futures settled up 2.95cts at $1.9842 gallon. Levine said waivers issued by the Environmental Protection Agency allowing small refineries to be exempt from meeting the Renewable Fuels Standard could pressure RBOB futures.

"EPA has now exempted 25 refineries from this requirement. If this is a precursor, EPA could effectively shrink this cost, lowering gasoline costs," said Levine.

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

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