Oil prices reverse late in session as heating oil contract plunges

© Reuters. FILE PHOTO: Oil barrels are pictured at the site of Canadian group Vermilion Energy in Parentis-en-Born, France, October 13, 2017. REUTERS/Regis Duvignau/

By Stephanie Kelly

NEW YORK (Reuters) -Oil prices fell on Friday, reversing in volatile trade, pulled downward by the U.S. heating oil contract that plummeted by more than 20% at one point on the day of its expiration.

The front-month U.S. heating oil contract, which is a proxy for diesel prices, soared to a record high of $5.8595 a gallon before falling as low as $4.4067 a gallon. Diesel futures have climbed as investors worry about tight supplies globally following Russia's invasion of Ukraine.

The heating oil contract expired on Friday, along with the global Brent benchmark and U.S. gasoline futures. Volumes in all three front-month contracts was low, creating outsized volatility in the market and leading to late-day sell-offs, analysts said.

"The fireworks were all in the expiring diesel contract," said Andrew Lipow of Lipow Oil Associates in Houston. "Today's expiry is especially volatile and may not be reflective of actual tightness."

The more-active second-month Brent crude futures contract fell 12 cents to settle at $107.14 a barrel. The expiring front-month contract rose $1.75 to settle at $109.34 a barrel.

U.S. West Texas Intermediate crude, which does not expire on Friday, fell 67 cents to settle at $104.69 a barrel, as traders sold energy contracts across the board.

The front-month heating oil contract's volatility was not mirrored in the more-active second-month U.S. heating oil contract, which gained $0.0088 a gallon to settle at $4.0172 a gallon.

Both Brent and WTI rose for the week and posted their fifth straight monthly gain. Brent ended the month up 1.3%, while WTI ended up 4.4%.

Prices have been buoyed by fears that Russian supply will continue to be disrupted by the conflict in Ukraine. Futures rose this week on the increased likelihood that Germany will join other European Union member states in an embargo on Russian oil.

Russian oil production could fall by as much as 17% this year, an economy ministry document seen by Reuters showed on Wednesday, as Western sanctions over Russia's invasion of Ukraine hurt investments and exports.

The oil and gas rig count, an indicator of future supply, showed U.S. oil rigs rose by three to 552 this week.

The Organization of the Petroleum Exporting Countries and allies are likely to stick to their existing deal and agree another small output increase for June when it meets on May 5, six sources from the producer group told Reuters on Thursday.

Still, there are bearish demand factors looming. China has shown no signs of easing lockdown measures which have hit its economy and global supply chains.

Crude's rally could stall and prices could average just less than $100 a barrel this year, a Reuters poll found on Friday, as economic risks and China's COVID lockdowns counter supply shortfalls due to the Ukraine war.