Crude-oil futures prices climbed to a 16-week high Thursday on news that Saudi Arabia, the world's largest oil exporter, cut production in December.
Analysts said the reduction likely came in response to weak near-term demand. But, if sustained in coming months, the reduction could offset somewhat the impact of rising U.S. oil output that is expected to help trim global prices this year.
Saudi Arabia, the world's biggest oil exporter, and the de facto leader of the Organization of the Petroleum Exporting Countries, cut output by 5% in December from a month earlier to 9.025 million barrels a day, a person familiar with the matter told Dow Jones Newswires. The drop was the largest percentage cut by the Saudis since January 2009, as the recession took hold and U.S. benchmark oil prices collapsed to $42 a barrel from a record monthly average high of $134 a barrel in June 2008.
The cut put Saudi output at its lowest level since May 2011, prior to an increase to cover lost supplies from the Libyan civil war. The Saudis boosted output to 10.1 million barrels a day last spring to cover lower exports from Iran as stricter sanctions took hold.
The latest Saudi move came as OPEC agreed in December to hold its output at 30 million barrels a day, meaning a cut of about 1 million barrels a day by members was needed. Oil Minister Ali Naimi pledged last month to abide by the pact, but said the kingdom would continue to meet customer demand for oil. Until now, analysts said, that has meant pushing more oil into the market to meet demand.
"It's hard to say that the Saudi move is anything but a reaction to seasonal demand cutbacks. The market is getting excited, but we have to see what the next few months bring," said Andrew Lebow, senior vice president of energy futures at Jefferies Bache in New York.
Light, sweet crude-oil futures for February delivery on the New York Mercantile Exchange settled 72 cents higher, at $93.82 a barrel, its highest level since Sept. 18. ICE North Sea Brent crude oil for February ended 13 cents higher, at $111.89 a barrel.
Brent's premium to the U.S. benchmark fell to a 16-week low of $18.07 a barrel at the settlement, down about $4 from a month ago.
"It is a weak time of year for refiners' need for crude," Mr. Lebow said, adding this is especially true in Europe, where margins are weak.
Typically, news of an output cut by Saudi Arabia would have a bigger impact on the price of internationally traded North Sea Brent crude oil than on the U.S. benchmark crude, which isn't exported, analysts said.
But Brent is under strong pressure in Europe from many unsold cargoes of Nigerian crude oil looking for buyers.
Less foreign crude of similar quality to Brent is finding its way to the U.S. Gulf these days, as changing logistics allow more domestic oil to move from the Midwest to the main refining region. Nymex crude oil has been underpinned by expectations that prices will rise as more oil makes its way out of the Cushing, Okla., delivery point for the futures contract to the U.S. Gulf, where it will compete with foreign crudes.
Meantime, Brent prices are under pressure from that increased competition.
Crude-oil inventories at Cushing stand at a record high, but are expected to soon decline as Gulf Coast refiners will be able to draw more oil from a coming addition to the Seaway Pipeline system. A new line opening this month will boost the flow to the Gulf to 400,000 barrels a day from 150,000 barrels a day currently.
Ed Morse, global head of commodities research at Citi Global Markets Inc., noted in a report this week that in the past five years, global oil demand in January has dropped by an average of 2.1 million barrels a day, before recovering by that volume in February.
The U.S. Energy Information Administration said in its short-term energy outlook released Tuesday that global oil demand in the second quarter this year will drop by 300,000 barrels a day from the first quarter, 10 times greater than the rate of decline last year.
The sluggish demand picture came as rising oil production led by strong gains in output from U.S. shale-oil fields has been coming into the market's focus. A 900,000-barrels-a-day rise in U.S. oil output this year is expected to account for most of a 1.4-million barrels-a-day gain in flow from producers outside of OPEC. That rise is expected to come amid a 940,000-barrels-a-day gain in 2013 global oil demand.
The EIA on Tuesday said it sees Brent crude falling $7 to an average of $105 a barrel this year on rising non-OPEC supply. Brent's premium to the U.S. benchmark will drop to $16 a barrel on average this year, as more domestic crude moves to the Gulf, the EIA said.
Analysts said prices Thursday also were supported by news that a bombing on a pipeline in Yemen had halted flows on the 120,000 barrels a day export line and data showing crude oil imports in China, the second-biggest oil consumer after the U.S., gained 8% in December from a year earlier.
February-delivery heating oil settled 1.56 cents lower at $3.0543 a gallon, while reformulated gasoline blendstock futures for February delivery settled up 1.44 cents, at $2.7933 a gallon.
Copyright (c) 2012 Dow Jones & Company, Inc.
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