Oil Futures Rally on Tightening Supply

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent futures on the Intercontinental Exchange reversed Thursday's losses and rallied Friday afternoon. This was due to reports of a sharp drop in output from the Organization of the Petroleum Exporting Countries in January, and this week's developments in Venezuela, with the United States slapping sanctions on the OPEC member's state-owned oil company.

According to a Bloomberg survey, crude production by OPEC fell 930,000 barrels per day (bpd) to 31.02 million bpd in January, the lowest output rate by the cartel since April 2015. The decline is more than the 800,000 bpd OPEC agreed to cut in December in a pact with 10 non-OPEC members led by Russia, with OPEC implementing almost 80% of the agreement curbing 1.2 million bpd through the first half of 2019.

The steep drop in OPEC output was led by Saudi Arabia, which cut far deeper than it pledged in Vienna in early December. Saudi output dropped 450,000 bpd against a quota to lower production by 322,000 bpd. Those deliberate curbs were combined by involuntary output declines in Iran, targeted by U.S. sanctions, and Libya, with both countries along with Venezuela exempt from the group's agreement. Iran's production fell by 150,000 bpd to 2.74 million in January, while total production dropped a whopping 39% since May 2018 when U.S. President Donald Trump announced the U.S. withdrawal from the Iranian nuclear accord.

Libya registered a 100,000-bpd production loss to 900,000 bpd in January due to continued unrest and violence in its Northern provinces. The country's biggest oil field, Sharara, remains shut after being occupied by an armed group for almost a month. The nation's exports have also been hampered by the repeated closure of oil terminals due to bad weather.

Although Venezuela posted a small production increase of 50,000 bpd to 1.27 million bpd last month, sweeping sanctions on its national oil company PDVSA this week is seen zeroing out U.S. imports of Venezuelan crude, which averaged 547,000 bpd in December. Although U.S. refiners may continue to buy Venezuela's heavy crude oil, the revenue is prohibited from going to the Maduro government.

Amid the further tightening in the market for heavy crude, Canada's Imperial Oil Ltd, the integrated oil producer active in the Alberta Province, is curtailing its rail shipments to a near halt in February, according to its chief executive officer. CEO Rich Kruger said on Friday that due to uncertainty caused by government--mandated production curtailments, Imperial reduced crude by rail shipments in January by nearly half to 90,000 bpd and plans volumes near zero in February. Alberta Premier, Rachel Notley, said earlier this week that mandated production cuts of 325,000 bpd in January to clear excess inventory have succeeded in drawing down 5.0 million barrels (bbl) from stocks. As a result, Notley is reducing the mandated cuts to 250,000 bpd in February and March.

In the United States the number of active oil rigs plunged 15 this week to 847, the lowest point in 7-1/2 months according to Baker Hughes Friday afternoon. Industry data shows the fourth weekly decline so far in 2019, with the U.S. oil rig count down 38 year-to-date.

Oil futures were also supported by investor optimism over the progress in U.S./China trade talks after meetings in Washington this week. Another round of high-level meetings between the two countries will be held in China mid-month.

The U.S./China trade dispute continues to weigh heavily on China's manufacturing sector, with the slowdown in China adversely affecting other export-driven economies. Economic data released overnight and early this morning shows manufacturing activity continues to slow in the eurozone with a contraction in the sector in China deepening in January.

In contrast, the Institute of Supply Management's Manufacturing Index for the United States gained to 56.0% in January versus expectations it would slip to 54.0%.

Nymex March West Texas Intermediate futures settled up $1.47 to $55.26 bbl, an 11-1/2 week high. ICE April Brent futures posted a $1.91 gain to $62.75 bbl at settlement. March ULSD futures rallied 3.53cts to a $1.9168-gallon settlement, and March RBOB futures gained 5.93cts to settle at $1.4369 gallon.

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