Oil Higher on OPEC Supply Freeze Hopes

NEW YORK (DTN) -- New York Mercantile Exchange oil futures extended higher Monday morning on growing hope leading oil producers including Russia and Saudi Arabia would freeze their production rate while data showing a resilient labor market in the United States raised the prospect of improved demand.

"Speculative positioning has become increasingly bullish in recent weeks, driven by news of substantial upstream capex cuts, frequent talk of an OPEC/non-OPEC output freeze, and bits of positive economic data," said Barclays Capital in a research note to clients.

Investors are also covering short positions after the market was oversold earlier this year. Technical charts are on the upswing and psychology has shifted away from the bear side, said Tom Bentz, head of energy derivatives at ABN AMRO Clearing Chicago LLC.

At 8 a.m. CT, NYMEX April West Texas Intermediate crude futures advanced 25 cents to $36.17 barrel, near a fresh two-month high on the spot continuation chart of $36.81.

May Brent crude futures on the IntercontinentalExchange climbed 33 cents to $39.05 bbl, edging off a 2-1/2 month spot high of $39.50. Brent widened its premium to WTI by 8 cents to $2.88 bbl at the open, the widest the spread has been in about two weeks.

In products trade, the NYMEX April ULSD futures contract edged up 0.91 cents to $1.1704 gallon, and has since rallied to a nearly three-month high on the spot continuation chart of $1.1898. April RBOB futures nudged up 0.81 cents at $1.3402 gallon, and have since rallied to a better-than three-month spot high of $1.3572.

The advance for RBOB futures reflects the seasonal shift in the gasoline market, with refinery maintenance season expected next month to curtail product output ahead of the summer driving season.

On Wall Street, the stock market eased amid worries among investors over China's lower growth target of 6.5% to 7.0% unveiled over the weekend. The U.S. dollar was up versus its peer currencies, having traded to two-week low last Friday.

Supply and demand fundamentals continue to be the main focus for oil traders.

Expectations the Organization of Petroleum Exporting Countries would freeze production is growing, while a strong jobs growth rate in the United States raised expectation of improving demand but also the potential for an interest rate increase by the Federal Reserve.

Monday morning, United Arab Emirates' oil minister Suhail al Mazrouei said that current oil prices are forcing all suppliers to freeze their production. Futures market psychology has shifted to short-term bullish since talks started to have OPEC and non-OPEC freeze their output at January levels. A summit to clinch a final deal by OPEC and non-OPEC members has been scheduled in Russia late this month.

Since trading to a low on Feb. 11, oil futures, especially the spot-month WTI contract, have been supported by positive chart formations that prompt buying by technically-savvy futures market speculators. Data from the Commodities Futures Trading Commission shows noncommercial market players added length in NYMEX crude oil and RBOB futures, and increased short market exposure in ULSD paper during the week ended March 1.

Domestically, oil futures have been supported by declining U.S. oil production. Baker Hughes' oil U.S. rig count showed a decline of eight to 392 rigs during the week-ended March 4, the 11th straight weekly decline. The number of active oil rigs has fallen sharply since peaking in the fourth quarter 2014. Rig count is seen as a proxy for U.S. crude production, which peaked in April 2015 at 9.694 million barrels per day. That was the highest monthly production rate since April 1971.

The outlook for oil demand is improving with a strong labor market. In February, U.S. job growth rebounded as nonfarm payrolls grew 242,000 and upward revisions of 30,000 new hires were made in the prior two months. The report eased concerns about the economy and bodes well for oil demand.

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