Oil Up as Kuwait Oil Strike Continues

NEW YORK (DTN) -- New York Mercantile Exchange oil futures advanced Tuesday morning as a strike by oil workers in Kuwait entered its third day, reducing supply that helped to offset Sunday's failure by leading oil producers to freeze their production at January levels.

The oil market has now moved beyond the disappointment from the failure of the talks in Doha to freeze output over the weekend and is looking forward to continued decline in U.S. production and higher demand as the economy picks up from its first-quarter malaise, said David Lebovitz, an analyst at Morgan Asset Management.

At 9:00 AM ET, NYMEX May West Texas Intermediate crude futures climbed 34cts to $40.12 bbl ahead of its expiration on Wednesday afternoon. June Brent crude oil futures on the IntercontinentalExchange rose 47cts to $43.38 bbl. NYMEX May ULSD futures rose 1.09cts to $1.2468 gallon while NYMEX May RBOB futures edged up 1.59cts to $1.4524 gallon.

On Wall Street, equities extended higher this morning while the dollar was lower, with a weaker dollar bullish for oil futures.

Thousands of workers in Kuwait, a member of the Organization of Petroleum Exporting Countries, are protesting public sector pay reforms, potentially reducing the country's output by about 60%.

News reports said Kuwait's oil production is expected to be down to 1.0 million bpd from 2.772 million bpd in March, which is the figure given by OPEC in its recent oil market report, citing secondary sources.

Outages have also been reported in Nigeria, Iraq, and South Sudan, although the production loss in Kuwait is the most serious and could last two weeks unless the government moves fast to deal with the situation, Bloomberg News reported.

"The Kuwaiti strike took out of the market more oil than the OPEC production freeze would have done," said Ed Morse, head of commodities at Citibank. "But the strike is temporary... it will be over soon, and [Brent and WTI] oil prices will go back below $40 bbl."

The failure of OPEC and non-OPEC producers to agree on an oil production freeze at January levels suggests each producer would concentrate on maximizing their market share, worsening an already oversupplied market. However, if the oversupply keeps oil prices low, then high-cost producers in other parts of the world may be forced reduce production, which could work to rebalance the market in the long run.

"The need for a freeze is no longer necessary because the market is on the way to rebalancing on its own," added Morse.

Domestically, an early survey of analysts by Schneider Electric shows the market expects U.S. crude oil inventories to have risen by an average of 1.8 million bbl during the week-ended April 15, with gasoline stocks seen down 1.3 million bbl and distillate fuel supplies unchanged on the week.

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