Oil Rallies in Monday Trade

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

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and the Intercontinental Exchange Brent contract are rallying in early trade Monday supported by a combination of geopolitical factors ahead of the OPEC meeting in Vienna later this week.

Brent crude broke through $60 barrel (bbl) Monday morning reversing from a 13-month low on the spot continuous chart, and the West Texas Intermediate contract swung to $52.92 after shedding almost 30% of its value in November. The major driver behind the rally is news President Donald Trump and China's President Xi Jinping reached a 90 days ceasefire agreement in the trade war between the world's two largest economies over the weekend at the high-stakes Group of 20 meeting. Trump agreed to cancel a planned Jan. 1 tariff hike on $200 billion worth of Chinese goods in return for China's purchasing of what the White House called a "very substantial" amount of American farm, energy and industrial goods to reduce the trade imbalances between the two countries. The temporary break in the U.S.-China trade war largely credited with slowing economic growth left the toughest issues to future bargaining sessions.

If the latest effort to reach some type of accord fails within an ambitious 90 days deadline, Trump said he will proceed with his previous plan to raise tariffs on Chinese products to 25% from 10%, which was to have taken effect on Jan. 1. The meeting came on the heels of slowing Chinese economy and eased investors' concerns over decelerated economic growth in the world's second largest economy and its knock-on effect on global oil demand.

Ahead of a scheduled meeting in Vienna on Thursday, an OPEC panel recommends members agree on a 1.3 million barrels per day (bpd) cut from their October output rate, which was 32.9 million bpd. Reports indicate Russia is more willing to extend output cuts later this week after a friendly meeting between Russian President Vladimir Putin and Saudi Arabia Crown Prince Mohammed bin Salman on the sidelines of the G-20 forum in Argentina. Previously, the Russian president showed no great enthusiasm for restricting his country's production again while Moscow's budget is much less dependent on oil prices than it was when Russia agreed to join OPEC-led efforts to rebalance the oil market in 2016 while the country's oil companies want to produce from the fields where they have recently invested. However, maintaining a united front with OPEC and his personal political relationship with MBS for Putin may be worth the sacrifice for Russian oil companies.

The Saudis have already announced a 500,000 bpd production cut for December, and are said to plan on reducing their output by 1.0 million bpd that would set production near their 10.058 million bpd quota set in the Vienna agreement reached in late 2016.

Qatar announced Monday that it would leave OPEC next month after joining the cartel in 1961, one year after it was established, to focus on its gas production. The amount of oil Qatar produced has steadily declined from about 728,000 bpd in 2013 to about 607,000 bpd in 2017, or just under 2% of OPEC's total output. In October, Qatar oil production was 609,000 bpd.

On Saturday, reports came that Iran launched the medium-range ballistic missile capable of carrying multiple warheads, and according to the White House, "has a range that allows it to strike parts of Europe and anywhere in the Middle East." The missile test violates UN Security Council resolution 2231 that bans Iran from undertaking 'any activity related to ballistic missiles designed to be capable of delivering nuclear weapons" and potentially can provoke a stronger response from the Trump administration to pursue a zero oil exports from Iran. The White House has previously issued eight waivers to countries including China and India to purchase a set amount of oil from Iran for 180 days beyond the Nov. 5 re-imposition of U.S. sanctions. Iran is currently expected to export about 900,000 bpd of crude oil for the next six months despite U.S. sanctions.

In early trading, Nymex January WTI futures were up $1.75 near $52.65 bbl, with ICE February Brent $1.90 higher near $61.35 bbl. Nymex January ULSD futures were up 6.05 cents near $1.8900 gallon, with January RBOB futures up 3.9 cents near $1.4410 gallon.

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

(CZ)

Brian Milne