Oil Futures Post Subdued Gains

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange registered modest gains Monday after mixed trading. The West Texas Intermediate and Brent contracts walked back overnight highs spurred by bellicose dialogue between the United States and Saudi Arabia over a missing journalist and critic of the Saudi ruling family, believed to have been assassinated in the Saudi Consulate in Turkey.

WTI and Brent rallied more than $1 bbl in the opening minutes of Monday's session Sunday night, following weekend comments from U.S. President Donald Trump promising "severe punishment" if the Saudis ordered the execution of Jamal Khashoggi, a Saudi citizen and reporter for the Washington Post whom declared self-exile in the United States. The Saudi government responded with a thinly veiled threat that it would use oil as a weapon if sanctions are placed on the kingdom.

"The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom's economy has an influential and vital role in the global economy and that the Kingdom's economy is affected only by the impact of the global economy," read a statement from the Saudi Press Agency on Sunday (10/14).

Oil futures turned lower early Monday after Trump said he dispatched U.S. Secretary of State Mike Pompeo to meet with Saudi Arabian King Salman bin Abdulaziz Al Saud. King Salman has no knowledge of what happened to Khashoggi, said Trump.

The incident comes three weeks in front of the start of U.S. sanctions on Iran's oil exports, which are down 800,000 bpd from April and expected to continue to decline through the rest of the fourth quarter. Earlier this month, news emerged that the Saudis and Russia agreed to hike their production to offset lost Iranian oil barrels on the world oil market.

The most recent data from the Organization of the Petroleum Exporting Countries show Russian oil production at 11.54 million bpd in September, a post-Soviet high, and Saudi crude output at 10.512 million bpd, the highest monthly production rate since November 2016.

In the United States, where crude production reached a record high 11.2 million bpd during the first week of the fourth quarter, the Energy Information Administration this afternoon said it expects tight shale oil production in seven key U.S. producing regions would average 7.714 million bpd in November, up 98,000 bpd or 1.3% from October.

The International Energy Agency last week urged major oil producers to produce all out in the fourth quarter to meet record world demand at about 100 million bpd, while adding global spare capacity has shrunk to 2%. Most of the spare capacity resides in Saudi Arabia, which said it could ramp up production to 12.0 million bpd if necessary. That provides the Saudis considerable sway in the oil markets, with the ability to send global crude prices skyrocketing should it hold its oil off the market.

Oil futures advanced despite growing concern over the economic outlook, with the International Monetary Fund last week downgrading its April forecast for world economic growth by 0.2% to 3.7% for both this year and in 2019.

"At the global level, recent data show weakening in trade, manufacturing, and investment. Overall, world economic growth is still solid compared with earlier this decade, but it appears to have plateaued," said IMF.

Last week, the EIA, IEA and OPEC all downgraded their outlooks for global oil demand for 2018 and 2019.

NYMEX November WTI futures settled up $0.44 at $71.78 bbl, and the ICE December Brent contract ended $0.35 higher at $80.78 bbl. NYMEX November ULSD futures settled up 0.44cts at $2.3257 gallon, and November RBOB futures ended the day with a 0.23cts gain at $1.9443 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

(BAS)

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