NYMEX WTI Futures Spiked 3.7%

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Intercontinental Exchange Brent crude rallied Friday afternoon with West Texas Intermediate spiking 3.7% on a weaker dollar and data showing a sixth straight drop in domestic oil rig drilling. Both crude benchmarks dropped more than 2% on the week under pressure from trade-related risks to global economic growth.

Oil futures posted across-the-board gains Friday, spurred by reports Saudi Arabia will further restrict supply to the global market in coming months to offset lower demand. The number of active rigs seeking oil in the United States dropped for a sixth straight week, down six in the week ended Aug. 9 to 764, according to the Baker Hughes report released this afternoon, the lowest level since the last week of January 2018. The U.S. oil-rig count has fallen 29 in the third quarter and dropped 105 versus the corresponding week in 2018.

Despite the two-session rally, the oil complex suffered steep losses this week amid an accelerating U.S.-China trade war, which threatens to drag the global economy into recession, according to market analysts. The U.S. Treasury declared China a currency manipulator this week after Beijing dropped the value of its national currency, the yuan, to the lowest level in a decade against the U.S. dollar, sending global equities and oil futures into a frenzy. Even after China quickly reversed the controversial move on Tuesday, investor's confidence was badly shaken and the oil complex continued to trend lower amid growing fears of a looming global recession. Following the latest flare-up in the U.S.-China trade spat, central banks across emerging markets cut interest rates in an attempt to insulate national economies against global headwinds.

Oil futures came under additional pressure midweek, with West Texas Intermediate and Brent collapsing to 7-months lows and plunging deep into the bear market. The U.S. Energy Information Administration released a surprisingly bearish supply report for the week ended Aug. 2 that seemed to reconfirm the market's fears of continued weakness in global oil demand. The report showed a sizable build in U.S. commercial crude inventories, the first in eight weeks, as well as gains in petroleum product supplies. Additionally, a sudden collapse of U.S. crude exports last week became the cherry on top of the sell-off cake. Some analysts attributed the steep 709,000 bpd drop in outbound crude flows from the U.S. to tighter arbitrage economics, but others pointed to a lack of buying interest for U.S. barrels from Asian markets.

This week the International Energy Agency and EIA revised lower demand forecasts for both 2019 and 2020, citing mounting trade-related risks to global economic growth. IEA in its Monthly Oil Market report released Friday cut forecasts for world consumption by 100,000 barrels per day (bpd) for this year and next. The Paris-based agency said global oil demand grew at the slowest pace since 2008 in the first quarter of this year, driven by downward revisions in the U.S. and India. Crude oil demand in OECD countries declined for three consecutive quarters, pointing to sharp slowdown in economic growth within the block. The agency also attributed downward revisions to the lack of progress in the U.S.-China trade dispute and noted "prospect for political agreement between China and the United States on trade worsened, there is growing evidence of an economic slowdown ... world's oil demand growth has been very sluggish in the first half of 2019."

Market participants increasingly view Saudi Arabia as leading rebalancing efforts this year against the headwinds of trade war and slowing global growth. Reports this week indicate Saudi officials approached OPEC producers to formulate a policy in response to the latest sell-off in oil complex. Riyadh has repeatedly said lower oil prices are unacceptable for the Kingdom and they would do whatever it takes to keep the market balanced.

NYMEX September West Texas Intermediate futures rose $1.96 to $54.50 barrel (bbl) settlement, while ICE October Brent contract advanced $1.15 to end Friday's session at $58.53 bbl.

NYMEX September ULSD futures settled up 3.14 cents at $1.8080 gallon and the September RBOB contract settled 2.83 cents higher at $1.6740 gallon.

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

(BAS)