U.S. oil futures reversed course to finish higher Friday, getting a boost as traders eyed developments in the U.S. relationship with China, and as another drop in U.S. oil rigs suggested further domestic production declines.
Oil prices soared after a spokesman for President Donald Trump said that despite rising tensions, Trump was not pulling out of the U.S.-China phase one trade deal,” said Phil Flynn, senior market analyst at The Price Futures Group, telling MarketWatch that the news “caused oil traders to cover.”
News on Trump’s press conference came out after oil futures settled.
Trump said the U.S. would take steps to sanction Chinese officials over Beijing’s plans to impose new security laws that could undercut Hong Kong’s autonomy. He did not, however, discuss reneging on the U.S. trade deal with China.
West Texas Intermediate crude for July delivery /zigman2/quotes/211629951/delayed CL.1 +2.15% /zigman2/quotes/209723049/delayed CL00 +2.15% rose $1.78, or 5.3%, to settle at $35.49 a barrel on the New York Mercantile Exchange. Front-month U.S. benchmark WTI futures rose 88.4% for May, for its best month on record, based on data going back to 1983, according to Dow Jones Market Data
Global benchmark Brent saw its July contract tacked on 4 cents, or 0.1%, to end at $35.33 a barrel on ICE Futures Europe Friday. It expired at the end of the session. Front-month prices rose 39.8% for the month, which was the strongest monthly rise since March 1999. The new front-month August contract /zigman2/quotes/209705444/delayed UK:BRNQ20 -1.37% settled at $37.84, up $1.81, or 5%, Friday.
The move higher for U.S. prices started right after the Baker Hughes report on U.S. drilling rigs, and “prices began to gain momentum as futures hit new session highs, broke above Thursday’s highs, and ultimately traded to new highs for the week into the primary session close,” said Tyler Richey, co-editor at Sevens Report Research.
Baker Hughes /zigman2/quotes/205323712/composite BKR +2.73% on Friday reported that the number of active U.S. rigs drilling for oil declined by 15 to 222 this week. The total active U.S. rig count, meanwhile, also fell by 17 to 301, according to Baker Hughes.
The rig count “continued to show steady declines in active oil rigs in the U.S. as the fallout from the supply chain disruptions and ultimately negative oil futures prices continues to work its way out of the market,” said Richey, adding that the total number of U.S. rigs at 301 was a record low.
Meanwhile, despite the concerns surrounding U.S.-China tensions, “demand has shown signs of coming back much more energetic and faster than most people had expected in China and the U.S. as well,” according to Flynn.
Signs of renewed demand as the U.S. and other major economies emerge from lockdown helped fuel strong May gains.
Demand increases are coming as U.S. production continues to plunge and output from the Organization of the Petroleum Exporting Countries has "crashed” in May, Flynn said.
Data from the Energy Information Administration Thursday showed a weekly decline of 100,000 barrels a day in total oil output to 11.4 million barrels per day.
On Friday, a Reuters survey revealed that OPEC oil output in May fell to the lowest in two decades. OPEC pumped 24.77 million barrels per day in May, down 5.91 million barrels per day from April’s revised figure, Reuters reported.
Oil prices collapsed in March and April as global demand for crude was destroyed by lockdowns of major economies in a bid to contain the COVID-19 pandemic. Pressure was exacerbated by a short-lived price war between Saudi Arabia and Russia that further flooded an oversupplied market with unneeded crude. That feud came to a halt after OPEC and its allies agreed to renewed production cuts. In addition, producers outside the pact, including U.S. shale drillers, have moved to sharply curtail activity in response to the price plunge.
Still, some analysts worry the rebound in prices could dampen production cuts.
“While oil prices remain low on an absolute basis, differentials and the shallow contango in the forward curve indicate a market that is at least functioning more normally,” said Jason Gammel, analyst at Jefferies, in a note. Contango is a condition in which later dated oil futures trade at a premium to the spot price. As oil prices collapsed, the contango steepened sharply, underlining the incentive to store crude.
“Our concern is that prices have reached a level that does not incentivize curtailments/cuts; this supply-driven rally is at risk if production returns too quickly,” Gammel said.
Back on Nymex, the June petroleum product contracts expired on Friday. June gasoline ended 2.7% higher at $1.0259 a gallon, with front-month prices up 47% in May—the largest since August 2017. June heating oil added 4.2% to 96.47 cents a gallon, up nearly 32% for the month.
July natural gas settled at $1.849 per million British thermal units, up 1.2% for the session, but down 5.1% for the month.
“While the weather remains a big catalyst for gas demand, we do think natural gas prices have more upside potential, especially to the degree that U.S. crude oil producers shut-in production or slash [capital expenditures], because it means less ‘associated gas’ that comes along for the ride,” said Stewart Glickman, energy equity analyst at CFRA Research.