Oil Futures Spike to 3-Month Highs

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

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied to three-month high settlements Friday and registered huge weekly gains. Production cuts by the Organization of the Petroleum Exporting Countries joined positive developments in trade and a confident consumer in the United States to rally oil prices.

Oil futures broke to the upside this week as data confirmed a steep decline in OPEC production led by Saudi Arabia, with Saudi's energy minister indicating output from the kingdom would decline further in March. Plunging U.S. oil imports and a steep drop in refinery run rates in the United States aided by unplanned outages further bolstered oil products, with the gasoline contract the week's top performer.

On Friday, NYMEX West Texas Intermediate March futures settled up $1.18 at $55.59 bbl, and gained $2.87 or 5.4% on the week, with the April contract settling up $1.19 at $55.98. March WTI futures expires Wednesday (2/20), with NYMEX closed Monday for Presidents' Day.

ICE April Brent futures settled $1.68 higher at $66.25 bbl, with the May contract up $1.70 at $66.22 bbl. The spot-month Brent contract surged $4.15 or 6.7% from prior Friday.

NYMEX RBOB March futures settled $0.0644 higher at $1.5729 gallon, with the April contract up $0.0544 at $1.7382 gallon. ULSD March futures settled $0.0487 higher at $2.0203 gallon, with April futures up $0.0493 at $2.0167 gallon. March RBOB futures rallied $0.1265 or 8.7% on the week, with March ULSD futures up a sharp $0.1118 or 5.9%.

Data from the three major forecasters -- Energy Information Administration, International Energy Agency and OPEC -- released this week illustrated Saudi Arabia's sinew in the oil market, with the kingdom determined to balance the market, cutting deeper than agreed to cuts under the OPEC+ agreement reached in December. IEA midweek reported OPEC output dropped to a nearly four-year low at 30.83 million bpd in January as the six-month agreement took effect, with Saudi output at 10.213 million bpd against a 10.311 million bpd compliance level. Saudi Energy Minister Khalid al-Falih said this week the kingdom's output would drop to 9.8 million bpd in March.

One might be tempted to link an unplanned outage at Saudi's Safaniyah oilfield, the world's largest offshore oilfield in the world with production of more than 1.0 million bpd, to the energy minister's comments this week. The Safaniyah field is operating at reduced rates for at least two weeks after a ship's anchor cut a main power cable, with restoration to full service uncertain.

However, the Saudis are determined to ensure credibility with the Vienna agreement, with non-OPEC oil producers that are part of the OPEC+ cuts not in compliance, namely Russia. OPEC on Tuesday reported Russian crude production declined 90,000 bpd in January to 11.56 million bpd, which compares with November output at an 11.65 million bpd post-Soviet high. Russian Energy Minister Alexander Novak this week said Russia wouldn't reach compliance until May. Russia in December agreed to reduce output to 11.191 million bpd, although Russian oil companies are bristling under the agreement.

Against this backdrop, commercial crude inventory in the United States increased for a fourth consecutive week through Feb. 8 to a 450.8 million bbl 15-month high, 28.7 million bbl or 6.8% above year ago. Nonetheless, EIA expects global oil supply to be drawn down by 1.3 million bpd in February despite world oil demand seasonally the weakest in the first quarter.

Brent's premium to WTI futures widened to a nearly four-month high at $10.66 bbl, with the Brent contract the international price marker.

WTI futures were also weighed down this week on a rallying U.S. dollar. In afternoon index trading, the dollar reversed down after closing a gap on spot continuous chart with a 97.23 two-month high.

Although weekly EIA data released midweek was bearish, internals detailed a longer-term bullish scenario -- declining U.S. imports.

Net U.S. crude and products imports tumbled 1.255 million bpd to 631,000 bpd during the first week of February, the second lowest net import rate on record. During the last week of November 2018, the United States was a net exporter.

As these developments emerged on the supply side of the barrel, progress in U.S.-China trade talks this week elicited confidence an agreement would be reached by the two major economies, averting an escalation in their trade dispute. Negotiations will resume next week in Washington, while progress in this week's talks in Beijing prompted U.S. President Donald Trump to indicate he could delay an increase in U.S. tariffs on $200 billion of Chinese imports by 60 days. The tariff increase is currently set for March 2.

Adding to the market's bullishness, the University of Michigan's Consumer Sentiment Index strengthened to a more than expected 95.5 in the preliminary February reading, up from a 91.2 nadir during the Trump administration in January. The January low was the lowest the index has been since the lead up to the 2016 election in October. Part of the reason driving the improvement were comments from the Federal Reserve indicating they would take a cautious approach before hiking interest rates.

Equities rallied, with the Dow Jones Industrial Average rallying more than 440 points in late afternoon trading.

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

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Brian Milne