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Oil holds momentum that's driven by OPEC's promise to re-balance

Feb 20 2018 10:14
Heesu Lee, Bloomberg

Seoul - Oil headed toward its highest close in two weeks on investor optimism after OPEC’s secretary general said the market’s journey toward equilibrium is gaining traction.

Futures in New York climbed as much as 1.7%, extending last week’s 4.2% advance. The “market re-balancing has gained massive momentum” as OPEC and its partners maintain output cuts, Secretary-General Mohammad Barkindo said on Monday.

Meanwhile, dwindling volumes at the biggest US storage hub and the potential for bigger cargoes to sail overseas has lifted American crude to a premium over Middle East oil.

After crude had the best start to the year in more than a decade, it’s struggling to recover to its recent high in January following the biggest weekly rout in two years earlier this month.

Surging American oil production continues to challenge OPEC’s efforts to alleviate a global oversupply, with forecasts pointing to record output from Permian shale basin that would put the region on par with some of OPEC’s biggest producers.

“Traders are extending last week’s rally on the view that Russia and OPEC will maintain production ceilings this year even if inventories decline and the price rises further,” said Ric Spooner, an analyst at CMC Markets in Sydney.

“However, the chances are that this rally will be capped below the January highs at this stage. Rising shale oil production will prove a headwind for the oil price for a while yet.”

Rising prices

West Texas Intermediate for March delivery, which expires on Tuesday, rose as much as $1.06 to $62.74 a barrel on the New York Mercantile Exchange and traded at $62.31 at 4:02 pm in Seoul. Monday’s transactions will be booked Tuesday for settlement because of the US Presidents’ Day holiday. The more active April contract added 1.2% to $62.27.

Brent for April settlement was at $65.57 a barrel on the London-based ICE Futures Europe exchange, down 10 cents. Prices added 83 cents to close at $65.67 on Monday. The global benchmark crude traded at a $3.29 premium to April WTI.

WTI was at a premium of 36c a barrel to the Dubai oil on Monday, compared with an average discount of about $2 over 2017. The American crude is strengthening versus the Middle East marker as a combination of new pipeline options, a rail car crunch, demand from Gulf Coast refineries and a thirst for US supply from overseas means less is being hoarded.

WTI has gained more than 8% since the end of November, when the Organisation of Petroleum Exporting Countries and its allies agreed to extend an output-curb deal until the end of this year.

The group is seeking to “ institutionalise” their cooperation beyond the end of a supply cut deal later this year, according to the United Arab Emirates, while Barkindo said compliance to the deal stood at 133 percent in January.

“The fundamental landscape is strong,” said Mark Keenan, global commodities strategist and head of Asia-Pacific research at Societe Generale SA in Singapore. “One of the factors is that the supply deal with OPEC and Russia is extremely compliant.”

Oil-market news:

• Oil inventories are set for a significant draw in the second half of this year, and OPEC will likely continue cuts until the end of 2018, Saad Rahim, chief economist at Trafigura, said at a presentation in London, adding that strong US supply will be met by strong demand growth globally.

• The flood of US oil exports stepped up a gear on Monday after the first fully laden supertanker sailed from an American port, alleviating a bottleneck that’s limited overseas shipments.

• Gasoline futures rose 1.4% to $1.7749 a gallon, extending last week’s 3% advance.

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commodities  |  markets  |  oil
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