Oil Futures End Up on Short-Covering

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled higher after a volatile week of trading, advancing ahead of the weekend on short covering following a test of key support points this week.

Fueling the upside was news that the United States rejected a French request for a waiver from U.S. sanctions to purchase Iranian crude, which take effect Nov. 4. Capping the upside for West Texas Intermediate were unconfirmed rumors that the United States was considering a release of crude supplies from the Strategic Petroleum Reserve.

"There are rumors out there in the trade that the Trump administration may release supplies from the Strategic Petroleum Reserve, though we're still trying to run them down," said Phil Flynn, senior market analyst with Chicago-based Price Futures Group.

The Energy Information Administration reported emergency crude supply in the SPR at 660.0 million barrels (bbl) as of July 6, down 18.9 million bbl against year prior.

"Overall the market was positive shaking off concerns about the increase in Libyan oil production. They're also coming to terms with the fact that there's a very high probability of another large U.S. crude decline next week," said Flynn.

On Wednesday, EIA said U.S. commercial crude stocks declined a greater-than-expected 12.6 million bbl to 405.2 million bbl during the first week of July. Prices failed to rally on the sizeable draw analysts say because the decline was the result of a sharp reduction in crude imports which slumped from 9.055 million barrels per day (bpd) in the prior weekly report to 7.431 million bpd for the week ended July 6.

This afternoon, Baker Hughes reported no change in the U.S. oil rig count this week, which sits at 40-month high with 863 rigs in operation.

Libya's National Oil Corp. lifted force majeure restrictions at four key export terminals in the eastern portion of the country this week, with exports expected to increase by 72,000 bpd by this weekend. Data from the Organization of the Petroleum Exporting Countries shows Libya's crude output plunged 254,000 bpd to 780,000 bpd in June, as an ongoing civil war closed eastern export ports and destroyed several storage facilities.

Even as Libyan supplies begin to return, analysts remain concerned that increased oil production would be sufficient to make up for lost oil output elsewhere, namely from OPEC members Venezuela and Iran. The International Energy Agency on Thursday highlighted the concern, saying the global oil market is "stretched to the limit."

"As countries comply with the U.S. Iranian sanctions, the market will be getting more concerned about the ability of OPEC non-OPEC nations to fill the gap, especially of the U.S. is successful in eliminating the majority of Iranian exports. So I expect the market will continue to keep an eye on world oil inventories over the next couple months and react accordingly," Andy Lipow, president of Houston-based Lipow Oil Associates said this morning.

IEA said Iranian oil exports dropped by 230,000 bpd in June from May, as "European purchases dropped by nearly 50%."

After a tough stance on waivers in June, with U.S. President Donald Trump wanting to zero out Iranian oil exports, U.S. Secretary of State Mike Pompeo this week indicated a willingness to work with a "handful" of select countries to consider waivers for limited Iranian crude purchases.

Flynn added that today's strong stock market, with the Dow Jones Industrial Average back over 25,000, and strong consumer confidence reading were also supportive for oil. "So given all this, people don't want to go into the weekend short."

NYMEX August WTI futures settled up 68cts at $71.01 bbl after testing support at $69.34. ICE September Brent crude futures settled 88 cents higher at $75.33 bbl.

NYMEX August RBOB gasoline futures rallied 3.5 cents to $2.1067 gallon, while ULSD futures gained 1.03 cents to settle at $2.1334 gallon.

Brian Whary can be reached at brian.whary@dtn.com