Oil Spikes Higher to End Tuesday

CRANBURY, N.J. (DTN) -- Oil futures closest to delivery on the New York Mercantile Exchange surged Tuesday, with the front-month Brent contract on the Intercontinental Exchange settling at its highest point since December 2014. This comes as nationalistic rhetoric in the trade spat between the United States and China gave way to conciliatory comments by the country's leaders, triggering a broad-based surge in equities and oil futures.

Tit-for-tat proposed retaliatory tariffs between the world's two largest economies triggered last month by U.S. tariffs on imported steel and aluminum gave way to friendly comments by U.S. President Donald Trump on Monday towards China's President Xi Jinping. Xi, in a keynote address to the Boao Forum for Asia early Tuesday, vowed to open China's market and reduce import tariffs, while speaking of win-win scenarios. These developments assuaged market worry that a U.S.-China trade war was brewing, and increase the likelihood for a negotiated settlement over trade disagreements between the two countries. A trade war would disrupt economic growth and dampen demand for oil.

The Energy Information Administration released their Short-term Energy Outlook midday in which they boosted their expectation for global oil demand while highlighting the risk to their forecast.

EIA projects global oil consumption at 100.31 million bpd this year, up 1.79 million bpd or 1.8% from 2017, and at 102.16 million bpd in 2019 for a 1.85 million bpd or 1.8% annual increase.

"A slowdown in global trade could affect oil demand and presents downside risks to the global oil consumption forecast, although the forecast was revised higher from EIA's previous STEO," said EIA. As the threat to oil demand is dialed down, geopolitical risk that could threaten world supply is increasing after the use of chemical weapons in Syria that killed women and children and pits the United States and allies against the Syrian regime, Russia and Iran. Trump condemned the alleged barrel bomb attack, and on Monday promised a forceful response.

The attack comes ahead of a May 12 deadline Trump set for major changes to be made to the Iranian nuclear accord. Failure to meet that deadline risks decertification of the accord by Trump, which would re-impose sanctions on Iran that analysts said could cut Iran's exports by 350,000 bpd.

Against this backdrop, oil production from the Organization of the Petroleum Exporting Countries fell 90,000 bpd to an 11-month low of 32.19 million bpd in March. The ongoing output decline by Venezuela was part of the reason for lower oil production by the cartel. U.S. oil production is expected to average at a 10.7 million bpd record high this year. Greater output gains might be capped by limited pipeline capacity from the Permian Basin.

"Crude oil production in the Permian region of Texas and New Mexico could be facing pipeline constraints, which is reflected in a widening discount of WTI Midland crude oil prices to Magellan East Houston crude oil prices," said EIA in their monthly outlook, with WTI Midland at an $8.70 bbl discount late last week-the widest discount in two years. "[T]he widening price spreads suggest that takeaway constraints could already be affecting oil producers," said EIA, noting new pipelines and pipeline expansions are not expected to be completed until the middle of 2019.

Meanwhile, market sentiment is very bullish, with money managers recently covering short positions in West Texas Intermediate and Brent crude futures.

At settlement, ICE June Brent was up $2.39 at $71.04 bbl, the highest settlement in more than three years. The rallying contract aligns with a Bloomberg report indicating Saudi Arabia wants oil prices at $80 bbl. NYMEX May WTI futures settled $2.09 higher at $65.51 bbl, and near a $65.86 two-week high. WTI's discount to Brent widened to a 2-1/2 month high at $5.53 bbl, boosting the incentive for U.S. exports, which topped 2.0 million bpd during the final week of the first quarter.

NYMEX May ULSD futures surged 6.82cts to $2.0648 gallon at settlement, ending near a $2.0696 two-month high on the spot continuation chart. NYMEX May RBOB futures settled up 5.67cts at $2.0409 gallon—the highest settlement on the spot chart since Aug. 31, 2017 when Hurricane Harvey was pummeling the Texas coastline.

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

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