Oil Gains - Pares Earlier Losses off Newfound Optimism

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After falling almost 6 percent earlier in the week, oil prices picked up steam Wednesday morning as traders saw a buying opportunity in the market. Oil settled up almost 3 percent off newfound optimism that Saudi Arabia and Russia are complying with agreed output cuts.

Not until mid-1Q of 2017 will there be definitive signs regarding whether the coordinated output cut of 1.8 million barrels per day – agreed among the Organization of the Petroleum Exporting Countries (OPEC) and other large producers – is actually winnowing down global supply.

In the meantime, however, the market has been strongly influenced by a rising dollar, and also has been reactive to diffuse signals that OPEC countries are potentially not adhering to individual production cut pledges.

The front-month WTI contract settled up 2.8 percent Wednesday on the NYMEX at $52.25 per barrel, while the Brent front-month contract rose 2.7 percent on the ICE to $55.10 per barrel.

Before the market open Wednesday, oil was trading down after Tuesday evening’s release from the American Petroleum Institute (API) that showed a larger than anticipated build to U.S. oil inventories of 1.5 million barrels for the week ending Jan. 6. Traders had been expecting a build of about 1.2 million barrels. Wednesday morning, the Energy Information Agency (EIA) backed the API’s estimates for builds to U.S. oil, gasoline and distillate stocks.

The EIA reported a rise to oil inventories of 4.1 million barrels; an increase of 5 million barrels to gasoline stocks; and, a build of 8.4 million barrels to distillate stocks (including diesel and heating oil). Oil, gasoline and distillate inventory levels are at or above the average range for this time of year.

The greater than expected build to oil inventories could largely be attributed to a significant increase to imports, which rose week over week by 1.9 million barrels per day to 9.1 million barrels per day. The U.S. refinery utilization rate rose week over week by 1.6 percent to 93.6 percent, and broke a 35-year record for the level of inputs into the refining system.

Wednesday’s EIA report reinforced the view that U.S. production is set to rise in 2017 – spurred by higher oil prices since the Nov. 30 announcement of an output cut among OPEC and other large producers, and also due to the steady increase in the U.S. oil rig count. For the week ending Jan. 6, the EIA reported that net U.S. crude production rose by 176,000 barrels per day, to 8.95 million barrels per day.

Since the beginning of the year, oil has traded in a narrow band, with the market waiting for clear signals that primarily OPEC was complying with its commitment to pare back 1.2 million barrels per day. Wednesday, markets read past a largely bearish EIA report and focused on evidence that Saudi Arabia was raising oil prices to Asian customers and was on course to do the same for European buyers – indicating that cuts were likely taking shape.

Until Wednesday, the market was largely unconvinced that the non-OPEC producers, led by Russia, would comply with their end of the bargain to cut up to 558,000 barrels per day. Given a patchy track record in complying with similar coordinated cuts, the market had discounted any potential production pullbacks from non-OPEC. The fundamentals point to an overwhelming supply of oil held in storage globally and is negative for oil. However, it does appear that newsflow from Russia – that it was indeed paring back production by 130,000 barrels per day in January – had an effect in helping boost prices on the day.

Delia Morris has worked in the international upstream oil & gas industry for over 13 years, and is currently Director, Global Energy Sector at Stratfor, a geopolitical intelligence firm that provides strategic analysis and forecasting services. Please contact Delia at delia.morris@stratfor.com


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