Oil Futures Rally on Trade Optimism

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and the Brent contract on the Intercontinental Exchange rallied during the first business day of December. Contracts rose on a 90-day truce between the United States and China amid their trade dispute, production cuts by Canada, and ahead of the end-week meeting by the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers led by Russia aligned with OPEC in a production quota scheme.

On Sunday, Alberta Premier Rachel Notley announced the province would temporarily reduce production in January by roughly 325,000 bpd in an effort to draw down excess storage and boost oil prices in the region that have languished amid a lack of takeaway capacity. On Friday (11/30), the spot value for Western Canadian Select was $21.93 bbl, a $36.35 discount to Brent, according to the Energy Information Administration.

The announcement followed a meeting between Russian President Vladimir Putin and Saudi Arabian Crown Price Mohammed bin Salman on the sidelines of the weekend's G-20 international forum in Buenos Aires, Argentina. Putin said Russia would cooperate with OPEC regarding oil production cuts in 2019, improving the odds for a favorable deal in Vienna when OPEC+ meets Thursday-Friday.

An OPEC panel recommended a production cut of 1.3 million bpd from October output rates, which were 4% more than the 2016 Vienna agreement. Saudi Arabia has already said it would cut output 500,000 bpd in December, with Saudi production at 11.0 million bpd in November 1.0 million bpd more than the 2016 agreement.

Russia's vote of confidence helps the Saudis achieve their goal, saying last week they wouldn't be the sole country making production cuts in 2019, when they expect world oil production to outpace demand by 1.0 million bpd. While seeking a united front, Qatar has broken ranks, indicating earlier Monday its decision to withdraw from OPEC in January. Qatar produced 609,000 bpd of oil in October. Qatar's decision could herald the demise of OPEC.

Separately, Iran test fired a medium-range ballistic missile on Saturday that drew the ire of U.S. Secretary of State Mike Pompeo, and could prompt the United States to tighten sanctions on the Islamic republic. Waivers granted to eight countries that allow a 180-day window from Nov. 5 to continue purchasing Iranian oil spurred heavy selling.

A 90-day delay in additional U.S. tariffs on Chinese imports that were set to take effect in January prompted a relief rally in equities and oil futures on hope the United States and China will avert an escalated and prolonged trade war between the two economic superpowers. China is reportedly considering buying a larger amount of U.S. products to narrow a trade imbalance with the United States.

Current U.S. tariffs on Chinese imports and slowing world trade because of an aggressive U.S. policy has adversely affected China's economy. Overnight, reports said China's Caixin manufacturing PMI edged up 0.1 to 50.2 in November, with 50 the demarcation line between growth and contraction.

In contrast, the U.S. industrial manufacturing purchasing manager's index was an as-expected 55.3 in November, with orders for exports at a nine-month high, and the Institute of Supply Management reported its manufacturing index surged from 57.7% to 59.3%.

"Comments from the panel reflect continued expanding business strength. Demand remains strong, with the New Orders Index rebounding to above 60%, the Customers' Inventories Index declining and remaining too low, and the Backlog of Orders Index steady. Consumption strengthened, with production and employment continuing to expand, both at higher levels compared to October," said Timothy R. Fiore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee.

While U.S. manufacturing continues to expand, J.P. Morgan's global manufacturing PMI remained lifeless at 52.0 in November, with new orders constrained by sluggishness in international trade flows. The eurozone manufacturing PMI came in above consensus at 51.8 for November, but down from 52.0 in October. India's Nikkei manufacturing PMI increased 0.9 to a 54.0 high for 2018 in November, suggesting India's economy has picked up pace in the fourth quarter after the growth rate slowed in the third quarter to 7.1% from 8.2%, due in large part to high oil prices.

NYMEX January West Texas Intermediate gapped $0.24 higher on the spot chart and rallied to a 1-1/2 week high $52.95 bbl settlement, up $2.02. ICE February Brent crude futures surged $2.23 to a $61.69 bbl 1-1/2 week high on the spot chart. NYMEX January ULSD futures settled at a one-week spot high at $1.8875 gallon, up 5.81cts. NYMEX January RBOB futures settled 2.95cts higher at $1.4314 gallon, paring an advance to a 1-1/2 week spot high of $1.4781 gallon.

The EIA will delay the release of its Weekly Petroleum Status Report a day because of Wednesday's National Day of Mourning in honor of U.S. President George H.W. Bush, releasing their statistical findings at 11:00 a.m. EST Thursday. The 41st president died Nov. 30 at the age of 94.

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

(CZ)

Brian Milne