Oil Continues Higher Thursday

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Brent crude on the Intercontinental Exchange continued higher in early trading Thursday morning with support from production cutbacks from Organization of the Petroleum Exporting Countries, while remaining under pressure from structural weakness in global manufacturing and turmoil in stock and currency markets.

Nymex February WTI futures gained $0.40 to trade at $46.94 barrels (bbl), reversing overnight losses, while ICE March Brent registered $0.73 gain to $55.64 bbl to follow the upward trend. Nymex February ULSD futures advanced to $1.7287 gallon, reversing from Wednesday's $1.6424 16-month low on the spot continuous chart, and February RBOB futures also gained 2.2 cents to a $1.3570.

In physical markets, oil production from OPEC dropped 530,000 barrels per day (bpd) to 32.6 million bpd in December -- the sharpest decline in volume since January 2017, according to Bloomberg. The cutbacks are led by Saudi Arabia that curbed output by 420,000 bpd to 10.65 million bpd last month, from the record of just above 11.0 million bpd reached in November.

Lower production volumes from Saudi Arabia were paired with the unintended shutdown of the El-Sharara and adjacent El-Feel oil fields in Libya that remained offline since the middle of December. Libya's production fell by 110,000 bpd to 1.0 million bpd in December, as a result of continued protests in the province with no clear path to resolution. Wire services reported late Wednesday that Libya's Es Sider port was forced to go offline due to severe weather conditions, causing another reduction of 100,000 bpd in exports from OPEC's wild card member.

Supportive data from OPEC comes as 1.2 million bpd in production cuts from OPEC and 10 non-OPEC members agreed in Vienna, Austria, at the start of December took effect this week. OPEC is responsible for 800,000 bpd of those cuts, with the Saudis expected to reduce output well above their reported 250,000 bpd quota. Production from OPEC is now 140,000 bpd below the October level. In order to comply with the agreement, OPEC needs to cut an additional 660,000 bpd, reversing the increases in production right before the agreement took place.

While oil futures are well supported by the survey on OPEC's cutbacks, prices remain under broader pressure from structural weakness in global manufacturing sector during the fourth quarter of 2018. Hit by the United States-China trade war, manufacturing indexes across Asia ended the year on a tumultuous note, causing concern among investors of a global recession in 2019. China's Caixin Manufacturing Purchasing Managers Index showed the manufacturing sector dipped into contraction for the first time in 19 months in December, while adversely affecting other export-oriented Asian economies. The Nikkei Malaysia Manufacturing Purchasing Managers Index hit 46.8 in December, the weakest pace in six and a half years, while Taiwan PMI fell to its lowest point since September 2015. Official economic data from Singapore detailed gross domestic product grew more slowly than originally forecasted in the fourth quarter 2018 while manufacturing contracted on a quarterly basis. South Korea registered lower factory output in the last month of 2018, affected by lower demand for smart phones and chips.

Contraction in China's economy led by slowdown in manufacturing sector has also affected the United States with the stock market registering the worst December since the Great Depression. In its latest U.S. Economic Analysis, Goldman Sachs reduced projections of U.S. economic growth from 2.4% to 2.0% for the first half of 2019, while in the second half of the year, the outlook is weaker at 1.75%. However, the firm's outlook says that the recession is unlikely in 2019.

The Energy Information Administration will update U.S. supply data for the week ended Dec. 28 at 11 a.m. ET Friday despite the partial government shutdown. EIA has FY 2019 appropriations and will continue publishing and collecting data, said the statistical and analytical division of the Department of Energy.

Liubov Georges can be reached at liubov.georges@dtn.com