Oil Rallies on Output Freeze Reports

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled higher this afternoon, rallying after a report from Russian news agency Interfax this morning said Russia and Saudi Arabia have struck a preliminary agreement to freeze their oil production at their January output level.

The Kremlin said this afternoon that “there’s hope” for a deal regardless of a lack of participation by Iran in the output freeze plan, Bloomberg News reported.

Iran had previously said it plans to raise its oil production rather than freeze output after winning sanctions relief in January, while Saudi Araba had been insisting that all the 13 members of the Organization of Petroleum Exporting Countries, including Iran, must freeze their supply for the plan to work. There has been no comment from the Saudis on the Russian news report so far today.

“The market is assuming this is a done deal, so this is the end of the Saudi oil war, which would be historic, and oil production should start to level off,” said analyst Phil Flynn at Price Futures. “Also, the EIA report was bullish about demand and IMF report was bullish about China.”

At settlement, NYMEX May West Texas Intermediate crude futures were up $1.81 at $42.17 bbl, off a 4-1/2 month spot high of $42.25. June Brent crude futures on the IntercontinentalExchange settled $1.86 higher at $44.69 bbl, off at a $44.81 better than four-month high on the spot continuation chart.

In products trade, NYMEX May ULSD futures spiked 6.12cts to $1.2759 gallon at settlement, and have since traded at a $1.2846 four-month spot high. May RBOB futures rose 2.66cts to settle at $1.5343 gallon, and near a 7-1/2 month spot high of $1.5386.

On Wall Street, the three main U.S. stock indices rallied with oil, while the dollar was flat after sinking to a 7-1/2 month low earlier in the session in index trade. A weaker dollar supports oil futures since oil trades internationally in the dollar.

A bullish demand outlook by the U.S. Energy Information Administration also boosted the oil futures complex. The EIA’s April Short-term Energy Outlook released today raised the agency’s global demand outlook for 2016 by 15,000 bpd from estimates in March, projecting a 1.2 million bpd consumption growth rate to 94.861 million bpd.

For 2017, consumption is projected to grow at a 1.3 million bpd rate to 96.187 million bpd, reflecting a 126,000 bpd upward revision from March estimates, the report showed.

The STEO data and the potential OPEC supply freeze offset the International Monetary Fund’s report cutting the world’s economic growth forecast for 2016 and 2017. IMF earlier today issued a report cutting its global economic growth forecast for 2016 to 3.2% from a prior estimate of 3.4% while trimming the 2017 outlook to 3.5% from a prior estimate of 3.6%.

IMF also lowered its the 2016 growth forecast for the United States to 1.9% from a prior estimate of 2.1%, but raised the growth estimate for China to 6.5% from prior forecast of 6.3%. Slowing economic growth dampens demand for oil.

Meantime, a survey of analysts Tuesday shows expectations that a crude stock draw of 700,000 bbl occurred during the week-ended April 8. If proven right, it would be the second straight weekly crude stock draw, and the second in the past nine weeks. On products, the survey shows gasoline stocks are anticipated to have been drawn down by 800,000 bbl while distillate supplies are expected to have increased 800,000 bbl during the week reviewed.

The American Petroleum Institute is scheduled to release its weekly data at 4:30 PM ET and the EIA at 10:30 AM ET Wednesday.

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