DTN Oil

WASHINGTON (DTN) -- Bolstered by a weakening U.S. Dollar Index, nearby delivery month West Texas Intermediate crude futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied in market-on-close trade Friday. Both benchmarks rose 1.5% after industry data from Baker Hughes reported the first decline in the number of operating oil rigs in the United States since the week ended Sept. 10, underscoring a laggard recovery in domestic production despite elevated price levels.

U.S. crude oil production remained about 200,000 barrels per day (bpd) below pre-Hurricane Ida levels in the most recent week, according to the U.S. Energy Information Administration, with domestic operators unexpectedly reducing output once again almost two months after Ida's landfall along the Louisiana coastline. The unexpected drop in domestic production coincides with the decline in the number of oil-targeted rigs in the U.S., often seen as a proxy for future output. Baker Hughes reported domestic operators decommissioned two oil rigs during the week ended Oct. 22, bringing the total number of operating rigs to 443, well below pre-pandemic rig counts of nearly 700.

Meanwhile, crude oil stored at the Cushing, Oklahoma, hub, the delivery point for WTI, fell by another 2.3 million barrels (bbl) through Oct. 15 to 31.2 million bbl, the lowest since October 2018, according to EIA's latest weekly report. Given the current supply deficit, the result is likely one where U.S. crude inventories will continue to grind lower in coming weeks, supporting WTI futures. Goldman Sachs estimates the fourth quarter supply deficit on the global oil market could be as high as 4.5 million bpd or 5% of the worldwide consumption.

"This is a big hole to fill even with the production increases that we have penciled in going from now to the end of this year," said Jeff Currie, head of Goldman Sachs's Commodity Research and Global Investment Research Division. "Maybe we can get that deficit whittled down to 2 million bpd, but we will be at a critical operating level of inventory by the year end" he added.

On the session, NYMEX WTI futures for December delivery rallied $1.26 to $83.76 bbl, while the December ICE Brent futures gained $0.92 to $85.53 bbl. November RBOB futures on NYMEX gained 0.20 cents to $2.4821 gallon, and front-month ULSD futures declined 1.02 cents to $2.5389 gallon.

Friday's gains in the crude complex came on the back of a softer U.S. Dollar Index that declined 0.17% against the basket of foreign currencies to finish the session at 93.595. Federal Reserve Chairman Jerome Powell said Friday during virtual press conference that he is now somewhat more concerned about higher inflation and the central bank would watch carefully for signs that households and businesses were expecting sustained price pressures to continue. "Supply-side constraints have gotten worse. The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation." Inflation soared in September to 3.1% from a year earlier, slipping slightly back from 3.2% in August.

Federal Reserve officials have signaled strongly in recent weeks that the central bank would formally announce tapering of its monthly purchases of $120 billion in asset purchases at its Nov. 2-3 meeting. "I do think it is time to taper," Powell said Friday. "I don't think it is time to raise rates," Powell added.

Separately, business activity in the European Union slowed sharply in October, dropping most markedly in manufacturing, though also cooling in services, according to a private survey from IHS Markit. Growth slowed especially sharply in Germany, down to the lowest since February, and slipped to the weakest since April in France. The rest of the region recorded the slowest expansion since April.

"A sharp slowdown in October means the eurozone starts the fourth quarter with the weakest growth momentum since April. A manufacturing sector beset with supply chain delays saw production growth falter to the lowest since the first lockdowns of last year. The services sector has meanwhile seen some of the summer rebound fade just as resurgent virus case numbers bring renewed concerns, notably in Germany," commented Chris Williamson, Chief Business Economist at IHS Markit.

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