Oil Moves Higher on IEA Outlook

NEW YORK (DTN) -- New York Mercantile Exchange oil futures climbed Monday morning after the International Energy Agency issued a report projecting shale oil production in the United States would fall this year and next, easing a glut of supply.

The oil market has been volatile in recent weeks and promises to remain that way this week, with Organization of Petroleum Exporting Countries expected to firm plans to freeze production at January levels while oil services firm Baker Hughes data showed a drop in rigs in operation last week.

However, the upside could be capped by the current buildup in inventories at the Cushing supply hub in Oklahoma, which is expected to keep ICE Brent premium over NYMEX West Texas Intermediate crude growing in the short term, analysts said. The March WTI is set to expire Monday afternoon.

"As U.S. supply cuts take place over the coming months, half of 2016 could see WTI time spreads strengthen relative to Brent time spreads, a contrast to the current environment which Brent time spreads are healthier," says Barclays Capital in a note to clients.

At 8 a.m. CT, NYMEX March WTI crude futures advanced $1.81 or 6.1% to $31.45 barrel, off a two-day high of $31.57 ahead of its expiration. The April WTI contract rose $1.79 or 5.6% to $33.54 bbl.

April Brent crude oil futures on the IntercontinentalExchange surged $1.72 of 5% to $34.73 bbl, off a two-day high of $34.85.

In products trade, the NYMEX March ULSD futures contract rose 4.85 cents or 4.7% to $1.074 gallon after inside trade, while the March RBOB futures contract climbed 4.29 cents or 4.5% to $1.0023 gallon, near a one-day high of $1.0087.

On Wall Street, U.S. stock indices tracked oil futures higher while the dollar strengthened sharply relative to the sterling pound and other peer currencies.

The main driver for higher oil prices this morning is the medium-term oil outlook from Paris-based IEA. The agency said it expects global oil supply and demand to begin rebalancing later this year through 2017 thanks to falling U.S. oil output, eventually prompting a rebound in the benchmark crude oil prices from roughly $30 bbl currently. U.S. shale oil production is now set to decline by 600,000 barrels per day this year and by a further 200,000 bpd in 2017.

However, the projected U.S. oil production drop will be brief, as domestic output will surge again to record levels by the next decade. The report said the 2015 to 2021 outlook sees domestic production reaching a record high of 14.2 million bpd after declining this and in 2017.

Also supporting oil prices were reports that key OPEC members and Russia could finalize a plan to freeze their production at January levels. Russia said they could have a firm deal with OPEC by the beginning of March and Nigeria became the latest OPEC member to support the plan to freeze output.

Reports said discussions are underway to let Iran bring back its output to pre-sanctions level before freezing its output.

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