Oil Futures Reverse on Profit-Taking

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery reversed lower on Thursday's session on profit-taking after recent gains. The March Brent contract on the Intercontinental Exchange expired higher, while the crude and ULSD contracts registered hefty gains in January.

NYMEX March West Texas Intermediate reversed down from a fresh 10-week high on the spot continuous chart at $55.37 bbl on profit-taking after testing retracement resistance at $55.36 bbl, although rallied $8.38 or 18.5% in January on a spot-month basis.

Traders focused on the WTI contract this week after the Trump administration Monday afternoon slapped sanctions on Venezuelan state oil company PDVSA, further tightening an already tight market for heavy crude needed by U.S. Gulf Coast refiners. Although U.S. companies may continue to buy Venezuelan crude, the revenue cannot go to the regime of Nicolas Maduro, who has usurped power to continue as president for a second term following fraudulent elections in 2018.

"By freezing PDVSA's U.S. assets and disallowing its access to U.S. dollars and the U.S. financial system, the U.S. aims to weaken Maduro's support domestically and to bring about a transition of power to the opposition led by Juan Guaido," said Eversheds Sutherland in a legal alert Thursday.

Attorneys with the firm noted while U.S. buyers of Venezuela's crude oil can make payments to a blocked account in the United States, which Guaido has access to, PDVSA "is reportedly demanding pre-payment for any cargo sold to any U.S. company or destined for a U.S. refiner."

"Because payments to PDVSA are blocked and the U.S. states that the opposition government has rights to the blocked accounts, it appears that no further cargos will be loaded from Venezuela for any U.S. destinations," said the international law firm. "Thus, in spite of the authorized 90-day licensed period for U.S. imports, U.S. refiners will likely be forced to rely on existing inventories or find alternative sources to meet supply requirements, with associated upward pressure on heavy crude prices."

WTI futures came under pressure in afternoon trade, which coincided with a strengthening U.S. dollar that reversed off a three-week low. The dollar came under pressure Wednesday afternoon after the Federal Reserve said it would be patient in raising interest rates, bending to the market's concerns over a softening global economy.

Monthly data released Thursday by the Energy Information Administration also showed U.S. crude production in November was about 200,000 bpd more than reported in weekly data, with EIA indicating output at 11.9 million bpd. In its most recent three weekly reports with data through Jan. 25, EIA indicates domestic output at 11.9 million bpd, which might be understated.

Thursday was also the second day of meetings between senior level trade representatives with the United States and China in Washington, where failure to reach a trade deal by March 1 will trigger increased tariffs on Chinese imports on March 2 that are widely expected to be retaliated against by Beijing. U.S. President Donald Trump is reported to have said Thursday that he expects a big deal with China or he will wait for one, with the comment seen raising the stakes in already high stakes negotiations.

China's Federation of Logistics and Purchasing Manufacturer's Purchasing Manager's Index released overnight showed a 0.1 uptick from December's more than two-year low to 49.5 in January, with readings below 50 indicating contraction.

NYMEX March WTI futures settled down $0.44 at $53.79 bbl, while ICE March Brent expired up $0.24 at $61.89 bbl, advancing $8.09 or 15.0% on a spot continuous basis in January. The April contract settled at a $1.05 bbl discount to the now-expired contract at $60.84 bbl.

NYMEX February ULSD futures reversed off an eight-week high on the spot continuation chart at $1.9300 to expire down 1.96cts at $1.8788 gallon, rallying 19.8cts or 11.8% on a spot basis in January. March USLD futures settled down 1.95cts at $1.8774 gallon.

NYMEX February RBOB futures reached a $1.4119 gallon one-week high before reversing lower to expire down 1.96cts at $1.3627 gallon, eking out a 3.9cts advance in January. March RBOB futures settled down 2.5cts at $1.3776 gallon.

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