Oil Rallies in Friday Morning Trade

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Intercontinental Exchange Brent futures rallied Friday morning, heading for strong weekly gains amid ongoing cuts from Organization of the Petroleum Exporting Countries, while domestic oil inventories in the United States climbed for a fifth straight week last week amid record domestic production.

In midmorning trade, Nymex West Texas Intermediate April futures shifted $0.51 higher at $57.47 barrel (bbl), a fresh better than three-month high, while ICE April Brent futures rose 1.6% on the week, up $0.32 at $67.39 bbl in early trading. ULSD March contract gained 0.41 cents at $2.0404 gallon, a fresh 3-1/2 month high. Nymex RBOB March delivery reversed from a $1.6263 3-1/2 month high, trading down 0.39 cents to $1.6105 gallon.

The Energy Information Administration reported on Thursday domestic crude supplies rose a fifth straight week, up 3.7 million bbl, for the week ended Feb. 15, while crude production continues to reset the record level, reaching 12.0 million barrels per day (bpd) in January. According to EIA projections, U.S. crude production will average 12.4 million bpd this year, driving growth in new global oil production.

U.S. crude exports also continued on the upward trajectory, reaching a record high 3.607 million bpd during the second week of February, EIA data shows. Earlier this week, news broke that India's largest oil refinery, Indian Oil Corp., reached an agreement to buy 60,000 bpd of U.S. crude oil from April to May 2020 in a deal valued at $1.5 billion.

Despite surging production and exports from the United States, oil futures have climbed 22% since the start of the year, mostly driven by larger-than-expected production cuts from OPEC and political turmoil in Libya and Venezuela.

Amid U.S. sanctions on Venezuela's state owned oil company Petroleos de Venezuela, S.A., the nation's oil industry is facing yet another challenge that could cripple its dwindling crude production. According to several wire services, Venezuela is having trouble finding new customers for its oil exports that were previously shipped to the United States. Last week, Venezuela's energy minister Manuel Quevedo travelled to India in an apparent bid to sell crude into this growing market. However, India has been purchasing already discounted Iranian crude and currently faces refining constraints which makes it unlikely to process additional crude from Venezuela.

PDVSA only has storage capacity for 44 million bbl, roughly equal to one month of production at the current level. Therefore, the Venezuelan government is running out of time to find new customers for its crude before oil production begins to stall due to the lack of storage, potentially causing a long-term irreparable damage to the nation's oil fields.

Venezuela's oil industry has been suffering from underinvestment for years, leaving the country's main source of revenues in sharp decline. Although some analysts believe Venezuela's risk was priced into the market a long time ago, the troubled South American nation will continue to be a wild card for oil markets in the near term.

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