Crude tests three-month highs amid Middle East tensions, US crude draw

New York — Oil futures settled more than 3% higher Friday as a large US crude draw and heightened Middle East tensions underscored supply risks.

ICE March Brent settled $2.35 higher at $68.60/b, and NYMEX February WTI was up $1.87 at $63.05/b at market close.

Crude futures had surged nearly 5% overnight Friday after the US confirmed it had killed Iran's top military commander, General Qassim Soleimani, in air strikes in Baghdad. But Brent and WTI futures pulled back from overnight highs during US trading, finishing the session, respectively, up 3.5% and 3.1% from their Thursday close.

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The threat of retaliation by Iran has severely raised the risks to Middle Eastern and US interests in the region, which could affect oil production and supplies, analysts said, but the market may struggle to hold onto this risk premium amid ample global oil supply.

S&P Global Platts Analytics sees Brent prices being capped at $70/b without another major incident, but a "disruption is possible in the days and weeks ahead," said Paul Sheldon, chief geopolitical adviser.

Weak US manufacturing data released Friday added further pressure to upside price movement. The Institute for Supply Management manufacturing Index fell for a fifth straight month to a 10-year low of 47.2% in December. An index below 50% indicates contraction in the sector.

NYMEX February ULSD settled up 3.73 cents at $2.0614/gal, and February RBOB was 4.46 cents higher at $1.7488/gal at market close.

US commercial crude oil inventories plunged 11.46 million barrels to a 12-week low of 429.90 million barrels during the week ended December 27, according to US Energy Information Administration data. But the large draw merely erased a supply overhang that had persisted since early September and returned inventories to roughly par with the five-year average.

Notably, US crude production was steady at all-time high of 12.9 million b/d last week, and exports jumped 1.01 million b/d to a fresh all-time high of 4.46 million b/d, EIA data showed. The export surge made the US a net petroleum liquids exporter for a second straight week by 1.73 million b/d, opening the largest ever net export surplus.

The spike in prompt-dated crude futures widened the backwardation in the one-year WTI forward curves to $5.57/b from $4.69/b on Thursday. The one-year WTI backwardation was last wider in mid-September on the heels of the September 14 attack on the Abqaiq and Khurais oil processing facilities in Saudi Arabia.

-- Chris van Moessner, christopher.vanmoessner@spglobal.com

-- Edited by Jim Levesque, newsdesk@spglobal.com