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US-China trade deal optimism keeps crude oil futures in black despite equity selloff

New York — A steep selloff in US equity markets knocked crude futures off early-session highs, but optimism regarding a potential thaw in US-China trade relations and a tightening supply picture for 2019 kept prices in the black Monday.

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ICE May Brent settled up 60 cents at $65.67/b and NYMEX April WTI was 79 cents higher at $56.59/b.

Crude prices began trending off session highs in late-morning trading after a weaker-than-expected construction spending report sent equity markets sharply lower. December construction spending dipped 0.6% from November, according to US Commerce Department data released Monday.

The weak construction data weighed heavily on equity markets. The Dow Jones Industrial Average, which had started Monday higher, was down more than 1.3% at the close of oil trading, after having clawed back some losses that took prices down more than 2% around midday.

NYMEX product futures traced crude markets Monday. April RBOB settled 1.87 cents higher at $1.7490/gal and April ULSD closed 1.33 cents higher at $2.0143/gal.

The oil complex held onto some early-session gains amid increased optimism that Washington and Beijing are close to signing a trade deal that could lift tariffs and ease tensions between the two countries. The deal would be the first sign of an end to a tit-for-tat trade war between the two nations that has added significant uncertainty to markets in recent months, weighing on economic outlooks and throwing previous demand growth estimates into doubt.

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At the same time the market was eyeing a potentially tighter near-term supply picture.

Canadian midstream operator Enbridge said an extended permitting process would slow completion of its 760,000 b/d Line 3 replacement project by as much as a year beyond its original mid-2019 start date.

The delay will force Canadian producers to bring crude to market through rail, likely fostering a build out in local storage that will add pressure on Western Canadian Select prices, S&P Global Platts Analytics analysts said. At the same time, the stepped-up crude-by-rail volumes would likely support WTI futures by bypassing storage hubs at Cushing, Oklahoma -- the delivery point of the NYMEX crude contract.

The US crude supply picture is also looking slightly tighter this week following a 10-rig decline in the Baker Hughes US rig count to 843 during the week that ended February 22. The report, released Friday, showed the second consecutive weekly drop, bucking analyst expectations of an increase.

The rig count decline came on the heels of a surprise decline in US production in December. US crude oil production fell to just below 11.85 million b/d in December, down 56,000 b/d from November and the first month-on-month decline in US oil production since May, EIA data showed Thursday.

Notably, the EIA Short-Term Energy Outlook forecasts production above 12 million b/d during January.

The US crude supply overhang likely continued to narrow last week, despite an expected uptick in inventories last week, an S&P Global Platts analysis showed Monday. Commercial crude stocks were expected to grow 1.9 million barrels to about 447.75 million barrels during the week that ended March 1, according to analysts Platts surveyed.

The build would pare the nationwide surplus to the five-year average of US Energy Information Administration data to 2.33%, the narrowest surplus to the average since early November.

The crude build came partly from a downturn in nationwide refinery utilization, which was expected to dip 0.3 percentage point to around 86.8% of total capacity, analysts said.

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

-- Edited by Valarie Jackson, newsdesk@spglobal.com