Oil Futures Higher on Supply Forecast

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled slightly higher Tuesday afternoon after the International Energy Agency raised its demand outlook and three Arab Gulf oil producers promised to comply with the recent agreement to cut production, but the gains were curbed by a stronger dollar.

IEA said oil demand was strong in the United States during the third-quarter, which may have continued through the fourth-quarter. As a result, the Paris-based energy watchdog revised up its global oil demand outlook, while suggesting the deals to cut production by the Organization of Petroleum Exporting Countries, if fully implemented, could bring the market back into balance, and even create a supply deficit of 600,000 barrels per day (bpd) by the first half of 2017.

In its Oil Market Report, IEA projected global net demand growth rate for this year at 1.4 million bpd, a 120,000 bpd hike versus November forecast. For 2017, the increase in demand is seen at 1.3 million bpd, up from an estimated 1.2 million bpd a month ago.

IEA said the Nov. 30 OPEC deal to cut output by 1.2 million bpd takes out of the market most of the 1.3 million bpd in output increases by cartel members during the past 11 months.

The 558,000 bpd output cuts agreed over the weekend by non-OPEC producers would reduce production growth rate for non-OPEC in 2017 by just over 200,000 bpd from a previously estimated 500,000 bpd rate.

"I'm in the same page with IEA, demand is solid," said analyst Phil Flynn at Price Futures Group. "These cuts will put us back in balance, and I think supply is getting tighter than most people think."

Today's rally was uncertain because NYMEX WTI and Brent crude on the IntercontinentalExchange briefly reversed lower in midsession before recovering, as Monday's rally appeared to fizzle.

Analysts said the early weakness for WTI was due to speculative players trying to book profits from a four-day rally. "The market may also be seeing some light book squaring ahead of this week's US inventory reports, although the consensus expectation is for moderate swings similar to a week ago," said Tim Evans, an oil specialist at Citi Futures.

Also supporting the oil futures complex, Kuwait, Oman and United Arab Emirates said they will cut their output in January, in line with the agreement. This comes after Saudi Arabia promised over the weekend to cut even deeper than the 486,000 bpd it previously pledged to cut.

Market attention now shifts to weekly U.S. oil inventory reports from the American Petroleum Institute and the Energy Information Administration. API's report is due out at 4:30 p.m. ET while EIA's is scheduled for a Wednesday morning release.

At settlement, NYMEX January WTI crude oil futures were 15 cents higher at $52.96 per barrel (bbl), off a $53.41 session high. ICE February Brent crude oil futures were up 3 cents at $55.72 bbl.

NYMEX January ULSD futures pared gains to a fractional 0.3 cent at $1.6747 gallon and the January RBOB contract settled up 0.77 cent at $1.5507 gallon.

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