Oil torn between broader market selloff, signs of tightening supply

By Henning Gloystein

SINGAPORE (Reuters) - Oil prices were largely steady on Friday, torn between a broad-based selloff across markets and signs that crude supplies are gradually tightening.

Brent crude futures, (LCOc1) the international benchmark for oil prices, were at $51.12 per barrel at 0711 GMT, up 9 cents from their last close but still set for a weekly drop of some 2 percent.

U.S. West Texas Intermediate (WTI) crude futures (CLc1) were at $47.17 a barrel, up 8 cent but also on track to fall over the week, down over 3 percent.

Oil prices have been weighed down amid a selloff across markets, including U.S. and Asian stocks, where investors voted with their feet amid growing scepticism that U.S. President Donald Trump, embroiled in controversy, would achieve his economic agenda.

The overall softness in financial markets added to the perception that oil supply remains higher than demand despite producer efforts to reduce output. The Organization of the Petroleum Exporting Countries (OPEC), together with non-OPEC producers like Russia, has pledged to restrict output by 1.8 million barrels per day (bpd) between January this year and March 2018.

"Sentiment in oil markets remains weak," U.S. investment bank Jefferies said.

Oil is declining even amid signs that crude markets are tightening.

The Brent forward curve <0#LCO:> has moved from contango into backwardation, where prices for immediate delivery are higher than those later on, for the three months of futures. A so-called backwardated market is considered a bullish sign for prices since it indicates that demand is outpacing supply.

Signs of supply tightness are also appearing in the United States, the world's biggest oil consumer. Despite a 13 percent jump in production since mid-2016 to 9.5 million bpd, the country's commercial crude inventories have fallen 13 percent from their March records to below 2016 levels.

On the demand side, Asia in particular could see some stronger crude orders going into the second-half of the year.

Driven by the start-up of a refinery in Yunnan province in southern China and the completed expansion of a fuel processing facility at Huizhou, Chinese crude oil imports are expected to pick up.

"We expect Chinese crude imports to increase by 700,000 bpd year-on-year on average in 2H 2017," said energy consultancy FGE.

New oil demand is also coming from Vietnam, which will see record crude oil imports in August as it readies its second refinery for start-up.

"As domestic crude production continues to fall, Vietnam's historical surplus in crude oil will come to an end by 2019, turning the country into a net importer," said Peter Lee, oil analyst at BMI Research.

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