Why Oil Prices Perked Up This Week

May 15, 2017 01:16 PM
Oil Pumps

Oil jumped to its highest level in more than two weeks after Saudi Arabian and Russian energy ministers stoked expectations that production cuts might be extended for as much as nine months.

Futures added as much as 3.8 percent in New York. While output curbs that started Jan. 1 are working, global inventories aren’t yet at the level targeted by OPEC and its allies, Saudi Energy Minister Khalid Al-Falih said Monday in Beijing alongside his Russian counterpart, Alexander Novak. The ministers agreed the deal should be extended through the first quarter of 2018 at the same volume of reductions, they said.

"When Saudi Arabia and Russia come out together it sends a very strong signal to the market," Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone. "With these two countries behind the extension of the accord, chances are very high that they will get all of OPEC behind it."

Russia and Saudi Arabia, the largest of the 24 producers that agreed to cut supply for six months, are reaffirming their commitment to the deal amid growing doubts about its effectiveness so far. An increase in Libyan output, together with a surge in U.S. production and signs of recovery in Nigeria, may undercut OPEC’s strategy to re-balance the market and boost prices.

West Texas Intermediate for June delivery climbed $1.33, or 2.8 percent, to $49.17 a barrel at 11:56 a.m. on the New York Mercantile Exchange. Futures touched $49.66, the highest since April 28. Total volume traded was about 50 percent of the 100-day average.

Brent for July settlement arose $1.30, or 2.6 percent, to $52.15 a barrel on the London-based ICE Futures Europe exchange. The contract reached $52.63, the highest since April 21. The global benchmark crude traded at a $2.66 premium to July WTI.

Money managers cut their bullish Nymex WTI bets back to where they were before OPEC agreed to cut output, data from the U.S. Commodity Futures Trading Commission show. Money managers’ WTI net-long positions fell by 34,290 positions to 168,814, futures and options in the week ended May 9. Net-long positions on Brent fell by 41,879 lots to 280,678.

"The drop in net-length set the stage for the rally," Tamar Essner, a New York-based energy analyst at Nasdaq Inc., said by telephone. "Nobody wants to be short going into the OPEC meeting."

Extending the cuts at already agreed-upon volumes is needed to reach the goal of trimming global stockpiles to the five-year average, the energy ministers of the world’s biggest oil producers said in a joint press conference. They will present their view at a Vienna summit of OPEC and other exporters on May 25.

“Preliminary consultations show that everybody is committed” to the output agreement, said Novak. “I don’t see reasons for any country to quit.”

OPEC members agreed in November to cut output by 1.2 million barrels a day. Several non-members, including Russia, reached an accord in December to contribute a combined 600,000 barrels a day of reductions.

Not everyone is on board yet. Kazakhstan, the biggest producer in the former Soviet Union after Russia, isn’t ready to join an extended accord automatically, its Energy Minister Kanat Bozumbayev said Monday, according to Interfax. The Central Asian nation will discuss its level of participation at the Vienna gatherings on May 24 and 25, the news service reported, citing the minister.

Powerful Signal

"It’s a powerful signal when Saudi Arabia and Russia come out together," Essner said. "They are the most important countries taking part and without their agreement you would not be able to get other countries to come onboard. An extension through end of the year was widely expected, yet garnering little traction in price, so they must have figured that they had to up the ante for the market to take them seriously."

Amid the cutbacks, U.S. production has risen to the highest level since August 2015. Output is poised to climb further in the months ahead as U.S. explorers stage the longest drilling ramp-up since 2011.

"This is bullish because they are going to extend the cuts longer than was expected," Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion, said by phone. "It’s also bullish for oil producers here. They will keep investing, drilling and building pipelines in the U.S."

Oil-market news:

  • Kazakhstan won’t automatically join an extension of the OPEC-led cuts and will discuss the nation’s level of participation at the May 25 meeting, Interfax reported citing Energy Minister Kanat Bozumbayev.
  • Libya is ratcheting up oil output with less than two weeks to go before the OPEC meeting.
  • Brazil oil giant Petroleo Brasileiro SA is taking advantage of a drop in borrowing costs to sell dollar-denominated bonds.

--With assistance from Javier Blas and Grant Smith

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Susan Warren, Stephen Cunningham

©2017 Bloomberg L.P.

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