Oil Futures Gain as Rig Count Plunges

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange settled higher on Friday, while also gaining on the week with the exception of the RBOB contract. Friday's gains were driven by the continued contraction in domestic rig activity and a weaker U.S. dollar. A bearish employment report released this morning increased the likelihood of a rate cut by the Federal Reserve later this month, spurring buying interest.

NYMEX October West Texas Intermediate futures settled up $0.22 at $56.52 barrel (bbl), and advanced $1.42 or 2.6% on the week. ICE November Brent contract managed a $0.59 gain to a $61.54 bbl settlement, and added $1.11 or 1.8% in value on a spot continuous basis from last Friday. NYMEX ULSD futures notched the largest weekly gain of 3.9%, while the October contract ended up 1.18 cents to $1.9003 gallon at settlement.

October RBOB futures were up 2.82 cents to settle at $1.5742 gallon, while on a spot continuous basis shed 2.4% in value on the week following prior Friday's expiration of the September contract as the gasoline contract transitioned away from peak driving demand.

Oil futures recovered early session losses spurred by concern over global oil demand after overnight data showed Germany's economy weakening further. A weaker-than-expected employment report also weighed on sentiment, although increased the likelihood the Federal Reserve would cut the federal funds rate by 25 basis points at the next Federal Open Market Committee meeting on Sept. 17-18.

Fed Chairman Jerome H. Powell indicated Friday the central bank is eyeing a rate cut next month, emphasizing a commitment to a policy of economic expansion.

"The Fed has, through the course of the year, seen fit to lower the interest rate path. That's one of the reasons that the outlook is still a favorable one," said Powell.

The chairman's comments came hours after the U.S. Department of Labor reported a less-than-expected 130,000 new jobs were added by the U.S. economy in August, below market expectations for job growth of 160,000. Agency also revised down job gains for June and July by a combined 20,000, while detailing a 0.4% uptick in average hourly earnings -- a key indicator watched by the central bank.

Friday's higher session was aided by a weakening U.S. dollar that reversed lower in response to the bearish employment report and heightened likelihood for a rate cut, but pared the weakness as the day wore on, settling slightly lower at 98.362 in index trading. The U.S. dollar traded at a more than two-year high this week at 99.3, as the U.S. economy remains stronger than other major economies.

The shortened holiday trading week included mixed signals on economic growth, with manufacturing contracting in the United States and in major global economies in August. On Thursday however, the Institute of Supply Management showed better than expected growth in the service sector last month, which accounts for nearly 70% of the U.S. economy.

Baker Hughes Friday afternoon reported a third consecutive weekly decline in the U.S. oil rig count, with the U.S. oil rig count having declined every week in the third quarter except one. At 783 as of the week ended Sept. 6, the number of active rigs seeking oil in the United States fell four to the lowest level since the week ended Nov. 17, 2017. According to the data, 147 rigs have been deactivated year to date with 55 of those reported in the third quarter.

The decline in drilling activity also correlates with a lower rate of domestic crude production last week, down 100,000 bpd to 12.4 million bpd, according to Energy Information Administration, although last week's lower output follows a record high level. Commercial crude stocks in the United States have declined for three consecutive weeks to close out August, down 17.5 million bbl or 4% over the period, while days of forward crude supply last estimated at 24.2 days has been below the five-year average since mid-August.

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

(BAS)