Oil Futures Up on Production Cut Talk

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery on the New York Mercantile Exchange and Brent crude on the IntercontinentalExchange rallied Wednesday into the close after selling off Tuesday, with volatility expected to continue for some time according to a number of analysts. West Texas Intermediate crude jumped more than 5.5% on the session and Brent more than 7.0%, with ongoing signs of slowing world economic growth, low or negative "beggar-thy-neighbor" interest rates deployed by several central banks and a mountain of crude and oil product supply clouding forward visibility.

U.S. equities were up sharply late Wednesday afternoon, with the Dow Jones Industrial Average again up more than 200 points and the S&P Index advancing more than 1.5%. The U.S. dollar jostled on either side of unchanged, dropping back from a 10-day high, with the greenback having an inverse relationship with domestic crude prices.

At settlement, NYMEX March West Texas Intermediate crude futures settled up $1.62 at $30.66 per barrel (bbl), but held within Tuesday's wide trade range, with ICE April Brent crude settling $2.32 higher at $34.50 bbl. NYMEX March ULSD futures settled 6.09 cents higher at $1.0879 gallon with March RBOB futures ending up 3.25 cents at $1.0034 gallon.

While rallying, the contracts all held below two-week highs registered during Tuesday's holiday-stretched session, with technical factors lending the complex upside punch.

NYMEX oil futures popped off afternoon lows with the release of minutes for the Federal Open Market Committee's Jan. 26-27 meeting, with Fed officials holding the federal funds rate flat after hiking the key interest rate to 0.25% from near zero in mid-December. The committee said economic conditions had weakened since their December meeting and that the risk to growth was skewed to the downside.

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run," states the minutes.

Low interest rates boost commodity and equity values.

The minutes followed the morning release of wholesale costs, with the Producer Price Index up 0.1% in January according to the U.S. Bureau of Labor Statistics, with the Consumer Price Index due for release Friday morning. Also released this morning, the Commerce Department reported housing starts fell 3.8% in January to an annual rate of 1.099 million from a downwardly revised 1.143 million annual pace in December, which was below expectation for an increase to 1.175 million.

Today's advance by oil futures was also supported by optimism the Organization of the Petroleum Exporting Countries would reach agreement on production policy despite opposition from Iran after an accord earlier this week between Saudi Arabia and non-OPEC producer Russia were reached.

Saudi Arabia and Russia have agreed to freeze production at their January output rate provided other OPEC members also do so, with Venezuela and Qatar quickly announcing their compliance to such a plan. However, it's unclear if Iraq would agree to the production freeze, with the country's crude production continuing to trend higher, with output at 4.35 million bpd in January, according to the International Energy Agency.

More doubtful than Iraq is Iran, which only recently won sanctions relief and plans to continue to boost production. News reports indicate Iranian deputy Oil Minister Rokneddin Javadi said Iran would increase crude production by 500,000 bpd by March 19, the date the current Iranian year ends, with the Islamic Republic shipping its first crude cargo to Europe in three years over the weekend. IEA shows Iran production in January at 2.99 million bpd.

Moreover, the production freeze is not a cut, and production was strong in January. The IEA showed production in Saudi Arabia at 10.21 million bpd and for Russia at a post-Soviet high of 11.22 million bpd.

Keeping the market on tenterhooks, Saudi Arabian Oil Minister Ali Al-Naimi said Tuesday the agreement to freeze production was a first step taken in an effort to stabilize global oil prices. Al-Naimi said they would assess the market over the next few months to ascertain additional steps that might be needed to counter the price collapse in oil, adding that the Saudis want a stable oil price. OPEC has a regular scheduled meeting on June 2 in Vienna.

Domestically, the market awaits data on the change in inventory for the week-ended Feb. 12 from the American Petroleum Institute this afternoon and from the Energy Information Administration at 11:00 AM ET Thursday. The market expects a 3.0 million bbl build in crude inventory, a 1.0 million bbl increase in gasoline inventory and a 1.5 million bbl draw in distillate fuel inventory.

Brian L. Milne can be reached at brian.milne@dtn.com

(CZ)

Brian Milne