Oil Futures End Friday Mixed

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled mixed on Friday, reversing from one-month low settlements earlier this week, as the latest round in U.S.-China trade talks ended without an agreement and the global oil supply-demand balance tightens. The crude contracts were little changed on the session, with Nymex June West Texas Intermediate futures settling fractionally lower at $61.66 per barrel (bbl), while ICE July Brent settled $0.23 higher at $70.62 bbl. Nymex June RBOB futures were up 1.37 cents at $1.9891 gallon and June ULSD futures gained 0.68 cents to $2.0504 gallon.

U.S.-China trade talks ended on Friday without a deal, although both sides remained optimistic that a comprehensive agreement may be reached in the coming weeks. U.S. President Donald J. Trump delivered on the promise to hike tariffs from 10% to 25% on $200 billion of China's goods, which became effective at 12:01 a.m. ET. The White House gave Beijing a three weeks deadline to reach an agreement before it enacts levies on additional $325 billion of Chinese products. China immediately vowed to retaliate, although no specific details of tariffs have become available.

After falling as much as 1.6% early Friday, U.S. equity indexes climbed later in the day after U.S. Treasury Secretary Steve Mnuchin said trade talks were constructive. Dow Jones Industrial Average finished Friday's session with a 114-point gain to 25,942.37, while S&P 500 Index advanced 0.37% in late trading.

Iran's Revolutionary Guard said on Friday it would reject an offer of negotiation with the United States, while suggesting it was willing to use military force against a U.S. aircraft carrier headed towards the Persian Gulf. Amid escalating tensions, Iran announced it resumed high-level enrichment of uranium and planned to pullback from the 2015 nuclear agreement altogether.

The White House slapped additional sanctions on Tehran's metals industry this week, doubling down the pressure from sanctions on oil exports. Meanwhile, European Union declined a 60-day ultimatum provided by Tehran to improve economic ties with Islamic Republic. Analysts indicate the heightened rhetoric from both sides this week sharply raised the odds of military confrontation in the heart of the oil producing region.

Domestically, Baker Hughes reported Friday afternoon the number of active oil rigs in the United States dropped two rigs to 805 rigs, bringing the rig count to a 13-1/2 months low. Against year ago, the U.S. oil rig count is down 39 rigs , with 80 rigs taken out of service year-to-date, including 11 in the second quarter.

WTI was also supported by bullish government statistics showing a sizable drop in U.S. inventories last week, joined by a lower rate of U.S. crude production. Despite recent declines in output, EIA remained bullish with its forecast for domestic crude production in both 2019 and 2020. For 2020, EIA projects domestic crude output would reach 13.38 million barrels per day (bpd), up 2.2% from April's forecast.

In its Short-term Energy Outlook, EIA said oil demand is expected to outpace supply, leading to a tighter global oil market. Government agency revised world oil production for this year down 410,000 bpd from April's projection to 101.11 million bpd, driven mostly by production declines from Organization of the Exporting Petroleum Countries, while global demand is projected to rise by 1.4 million bpd this year.

Given the expected delayed response of global crude oil production to current oil market fundamentals, EIA now expects average net global oil inventory withdrawals of about 400,000 bpd during the second and third quarters.

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