Oil Rallies on Trade Deal Hope

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange rallied Friday, with West Texas Intermediate settling 2.8% higher, fueled by optimism that a U.S.-Mexico trade deal will be reached, while a weaker U.S. dollar and steep drop in U.S. rig count offered additional support.

Oil futures registered gains for a second consecutive session after Trump administration indicated the United States may delay the 5% tariff on Mexico set to take effect on Monday. President Donald Trump said Friday that Mexico may be able to avert tariffs on its goods by purchasing U.S. agricultural products, while previously stating the tariffs are set to deter unlawful immigration at the southern border. "The trade war deal is what the markets need to break out of the bear territory," said Helima Croft of RBC Capital Market this week.

WTI dipped into a bear market midweek, as investors raised concern about intensifying trade disputes and stalling global growth. Demand sentiment remained week after Word Bank lowered its global growth forecast this week to 2.6% from January's 2.9%, while also cutting its forecast for growth in global trade by a full percentage point for the current year.

"The global economy stumbled in the first half of the year with trade and investment flows between countries falling faster than expected," said Word Bank in its semiannual economic report released this week. Domestically, Bureau of Labor Statistics said on Friday the United States added just 75,000 new jobs in May, well below expectations for job growth of 180,000. Federal data also revised lower employment gains for March and April by a combined 75,000 jobs. Bearish jobs report pressured U.S. dollar to settle at a six-week low on Friday, while also spurring market expectations for two rate cuts this year. Markets rallied this week after Federal Reserve officials said they would respond to any economic deterioration by cutting interest rates.

In oil markets, U.S. active rig count dropped 11 this week to 789, a 16-month low, according to Baker Hughes data. The U.S. oil rig count has declined in four of the past five weeks, with operators pulling 27 rigs from the field in the second quarter and 96 year-to-date. Against the backdrop of lower rig count, domestic production reached a new record high last week of 12.4 million barrels (bbl), exerting downward pressure on the U.S. crude benchmark.

Saudi Energy Minister Khalid al-Falih said on Friday the current price level is too low to encourage investment in the industry, while emphasizing that a return to 2014 price crush is unacceptable for the kingdom. During an industry conference in St. Petersburg, the Saudi official reiterated his country's commitment to balance the market amid rising global uncertainties, including trade disagreements.

NYMEX July West Texas Intermediate settled up $1.40 at $53.99 bbl, a six-session high after trading at a five-month low early Thursday. ICE August Brent futures were up $1.62 to finish the session at $63.29 bbl. NYMEX July RBOB futures advanced 3.13 cents to settle at $1.7389 gallon, with July ULSD futures settling up 3.65 cents at $1.8248 gallon.

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