Oil Futures End Up; Supplies Tightening

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Brent crude on the Intercontinental Exchange settled higher in capping this week's trade, although declined against the prior Friday, with traders following a plethora of competing news affecting oil supply and demand fundamentals.

The market's reaction to this week's developments in Venezuela was mild, but did offset a sharp weekly build in U.S. commercial crude stocks, as the regime of Venezuelan President Nicolas Maduro is facing its stiffest opposition to date. Venezuela, one of the five founding members of the Organization of the Petroleum Exporting Countries, has seen its oil production freefall since Maduro assumed power in 2013.

Wednesday will likely be marked in the history books after Juan Guaido, the recently elected head of the National Assembly, cited Venezuelan's constitution in claiming he is the "president in charge," following what is widely considered the illegitimate election of Maduro to a second six-year term as president in May 2018. Maduro was sworn into his second term last week.

The United States quickly recognized Guaido as Venezuela's legitimate leader, as did Canada and several other South American countries. The United States is considering sanctioning Venezuela's oil industry to pressure Maduro, who continues to control the country's military.

It's unclear what action the United States will take, but concern the Trump administration could ban crude sales to the United States is seen further tightening the heavy crude market, lending upside support for West Texas Intermediate futures.

U.S. Gulf Coast refiners operate complex refineries re-engineered more than a decade ago to support processing a heavier crude slate. That was before the shale revolution that has led the United States to become the largest crude producer in the world, although output is a light grade that needs to be blended with heavier blends so refiners can operate efficiently, and produce middle of the barrel products, including diesel fuel.

Canada has abundant heavy crude reserves, although years of political opposition to building the TransCanada Pipeline leaves much of that supply stuck north of the border. The inability to bring Canadian crude to market without a substantial discount to world prices prompted the Alberta government to mandate a 325,000 bpd production reduction during the first quarter in an effort to work down elevated inventory.

Mexico, another producer of heavy crude, has seen output steadily decline for years, which prompted the country five years ago to change its constitution and open business to private companies. Meanwhile, OPEC+ is nearly one month into a six-month production agreement reducing output 1.2 million bpd, with Saudi Arabia eager to tighten the world's supply-demand balance, making deeper cuts to its output than obliged under the pact to ensure success. The Saudis have also focused on reducing exports to the United States, partly because U.S. oil statistics are transparent and provide a clearer view of supply-demand dynamics.

Venezuela is currently the third largest exporter of crude to the United States, with Energy Information Administration data showing U.S. imports at 574,000 bpd in December.

The complicated backdrop helps to explain why WTI futures advanced Thursday and Friday following the EIA's supply report Thursday showing an unexpected 8.0 million build in commercial crude stocks for last week that lifted inventory to an eight-week high of 445.0 million bbl, up 8.1% against year ago.

Abundant supply of gasoline weighed heavily on RBOB futures, with the gasoline crack spread against the Brent contract negative since Jan. 4, and underwater for nearly half of the fourth quarter 2018. At minus $3.29 bbl at settlement, gasoline economics are the weakest since November 2011.

EIA reported gasoline supply in the United States has increased for eight weeks running, up 35.0 million bbl since late November, and 4.1 million bbl last week to a 259.6 million bbl record high.

Gasoline imports plunged 283,000 bpd last week to a 547,000 bpd 4-1/2 month low, with a decline in sales to Mexico amid a crackdown in fuel theft by the country's new president, Andres Manuel Lopez Obrador, helping to explain part of the decline. AMLO, as he is known, shut pipelines in late December to crack down on rampant theft, but also created widespread shortages across the country and logistical nightmares that have tied up imports at ports.

AMLO also hoped to reduce Mexico's dependence on U.S. gasoline imports, but as ESAI Energy noted in a market note this morning, the plan has backfired, prompting Mexico to abandon its plan of shutting pipelines while importing even more gasoline from the United States, which has yet to show up in EIA data.

"Mexico's gasoline imports for the second week of January rose to 757,000 b/d, double what they were for the same week last year, and 250,000 b/d higher than the previous week this year," said Chris Cote, an analyst with ESAI Energy.

ESAI Energy said Mexico's refineries produced 100,000 bpd of gasoline during the first half of January while demand was 790,000 bpd.

The "Madero and Minatitlan refineries will remain offline longer than the government initially expected in 2019, forcing the import of more gasoline from abroad, especially the U.S. Gulf Coast," said ESAI Energy.

Oil futures sold off early this week on bearish macroeconomic data showing a sluggish Europe and slowdown in China, with Beijing reporting gross domestic product slowed to a 28-year low in 2018. U.S. data was largely upbeat in comparison, although sentiment is shifting amid the partial government shutdown.

U.S. President Donald Trump announced his support for a three-week continuing resolution to open the government as budget negotiations continue, with the U.S. Senate is set to vote on later Friday. Separately, senior representatives from China are to arrive in Washington on Monday in an effort to negotiate a trade deal that ends a trade dispute between the world's two largest economies. U.S. tariffs on Chinese imports that prompted retaliatory tariffs from Beijing have slowed world growth, with concern the dispute could escalate, scaring off business investment.

At settlement, NYMEX March WTI futures gained $0.56 to $53.69 bbl, while down $0.11 from prior Friday on a spot continuous basis, with the February contract having expired on Tuesday. ICE March Brent settled up $0.55 at $61.64 bbl while down $1.06 on the week, ending at a $0.05 premium to April delivery. Brent's premium to WTI narrowed to a $7.95 bbl fresh, four-week low.

NYMEX February RBOB futures settled up 0.18cts at $1.39894 gallon while down 6.34cts on the week, with the March contract settling at a 1.53cts premium to February. NYMEX February ULSD futures advanced 0.63cts to $1.8919 gallon while down 2.41cts from prior Friday, with March delivery ending at a 0.52cts discount to the front-month contract.

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

(CZ)

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