DTN Oil

WASHINGTON, D.C. (DTN) -- While the RBOB contract was an outlier, softening Wednesday afternoon, West Texas Intermediate and ULSD futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled the session with solid gains after the OPEC+ alliance agreed to cut their collective output by 2 million bpd next month -- a much higher reduction than initially expected by the market, and on a bullish inventory report showing across-the-board draws from U.S. oil stocks.

Defying calls from U.S. and European officials to pump more oil, OPEC+ agreed today on the largest production cut since April 2020 when the producer coalition reduced collective output by 9.7 million bpd amid collapsing demand during the early months of the global pandemic. The motivation behind today's decision is up for speculation, with some pointing to a rational policy to get ahead of a world market faced with the risk of a global recession that would sink demand and lead to inventory builds. Others argue the Saudi-led coalition has started an all-out price war with the Western alliance.

Most of the announced 2 million bpd production cut would fall on the shoulders of five of the 23 OPEC+ producers, led by Saudi Arabia and Russia that would equally reduce crude output by 526,000 bpd. Iraq agreed to cut output by 220,000 bpd, United Arab Emirates by 160,000 bpd, and Kuwait by 135,000 bpd.

Combined, OPEC members account for 1.273 million bpd of the announced cut, while Russia-led producers will reduce oil output by 727,000 bpd.

It is notable that OPEC+ members have been producing far below their official target levels for months now, In August, OPEC+ underproduced against their quota by 3.4 million bpd, meaning the volume that would be removed from the market in November would be smaller than 2 million bpd.

Still, even a cut in the ballpark of 700,000 to 1 million bpd would tighten the physical market. That tightening would transpire while industry oil stockpiles held by countries that are part of the Organization for Economic Cooperation and Development were last measured 9.2% below the five-year average in August, according to International Energy Agency. While the cartel has often cut production in the face of weakening demand, it has never implemented a cut in such a tight market, said Goldman Sachs in a research note from Monday.

Further lending support to the oil complex, Energy Information Administration's inventory report released midmorning showed U.S. commercial crude inventories fell 1.4 million bbl last week, counter to expectations for a 1.3 million bbl build, and despite a 6.2 million bbl drawdown from the Strategic Petroleum Reserve. The draw pressed inventory to a four-week low while 13.1 million bbl or 3% below the five-year average.

The draw was realized as the U.S. refinery run rate rose 0.7% to 91.3% of capacity against expectations for a 0.4% decline in utilization, with refiners processing 210,000 bpd or 1.3% more crude oil during the final week of September. Crude exports remained strong too at 4.551 million bpd, the third highest weekly export rate in 2022.

Data for gasoline was also bullish, with EIA reporting a 640,000-bpd jump in implied demand for the final week of September to 9.465 million bpd -- the highest weekly consumption rate for the transportation fuel in 2022. While gasoline demand typically trends lower in September, inventory movement from Gulf Coast refiners to southeastern states ahead of Hurricane Ian might have boosted the implied demand reading, which measures the barrels delivered to the U.S. market. PADD 3 Gulf Coast gasoline stocks were drawn down 3.8 million bbl during the week reviewed to 78.6 million bbl, an 18-month low.

At settlement, November WTI futures advanced $1.24 bbl to $87.76 bbl, and ICE Brent futures for December delivery rallied to $93.37 bbl, up $1.57 bbl on the session. NYMEX November RBOB futures retreated 1.45 cents to $2.6685 gallon, and front-month ULSD futures surged to $3.6869 gallon, adding 15.11 cents on the session.

Liubov Georges can be reached at liubov.georges@dtn.com