Oil Ends Higher on Hopes of OPEC Cuts

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled higher Thursday afternoon, led by a rally for the ULSD contract on talk of a possible cut in production by the Organization of the Petroleum Exporting Countries while the dollar reversed lower after the European Central Bank disappointed the market.

The rally for ULSD futures was seen as a delayed reaction to the decision on Monday by the Environmental Protection Agency to raise 2014-16 renewable volume obligations from levels proposed in the spring. The increase would boost demand for diesel much more than gasoline, said analyst Andy Lipow in Houston.

The biggest driver for the oil complex rally was, however, a report by Energy Intelligence claiming Saudi Arabia would propose a deal to balance oil markets with non-members of OPEC by cutting 1.0 million barrels per day in oil production.

There are still doubts on whether OPEC would indeed cut production when members meet Friday in Vienna to discuss oil market conditions and output policy. "I do not think there will be an OPEC production cut," said Lipow.

NYMEX January West Texas Intermediate settled $1.14 higher at $41.08 barrel, holding above $40.00 bbl and Wednesday's $39.84 two-week low. ICE January Brent climbed $1.35 to $43.84 bbl.

In products trade, NYMEX January ULSD futures rallied 5.37 cents to a $1.3586 gallon settlement after trading Wednesday at a 6-1/2 year spot low of $1.3033. January RBOB futures added 0.32 cents to $1.2963 gallon at settlement, reversing off a one-week spot low of $1.2774.

On Wall Street, the stock market accelerated to the downside Thursday afternoon, with the Dow Jones Industrial Average falling 300 points, after ECB President Mario Draghi announced a more limited set of stimulus measures than expected while Federal Reserve Chair Janet Yellen said the Fed is ready for a rate hike during a Congressional testimony, reiterating comments made Wednesday at the Washington Economic Club.

Draghi said the ECB would extend the duration of its $60 billion euro asset purchase program through at least March 2017 or further if needed, but did not increase the size of the program as the market expected. The ECB also cut the bank deposit rate by 0.1% to negative 0.3%, but the market thinks that's not enough given Drahi had telegraphed over the past two months that he would do whatever it takes to jumpstart the economy.

As a result, the dollar reversed lower after having rallied earlier to the highest level since March 2003. The euro traded in a wide range, and fell to the lowest level since 2009.

The market was primarily focused on Friday's OPEC summit. The report saying Saudi Arabia was considering proposing OPEC output cuts of 1.0 million bpd was dismissed by many analysts because the proposal is based on conditions that may not be fulfilled. It requires Iran and Iraqi to cut their output from current levels, but Iran is unlikely to comply since Tehran only recently won the right to raise its production after being under sanctions since 2012. It also requires non-OPEC producers such as the United States, Mexico and Russia to also cut production.

Saudi Arabia has been opposed to an output cut because their strategy depends on maintaining market share in the face of competition from the United States instead of defending a higher oil price by reducing production. OPEC announced this shift in its strategy Thanksgiving Day 2014.

OPEC currently produces about 1.0 million bpd above the 30.0 million bpd supply quota agreed to three years ago.

George Orwel can be reached at george.orwel@dtn.com