CRANBURY, N.J. (DTN) -- Nearest delivered oil futures traded on the New York Mercantile Exchange were higher for a second straight day early Thursday, extending a rally ignited midmorning Wednesday as the contracts tested key support points following a two-day sell-off.
Amid overbought market conditions created as noncommercial traders amassed a large net-long position, an early week selloff was sparked by doubt production cuts by the Organization of the Petroleum Exporting Countries and 11 non-OPEC oil producing countries would balance a global oil market now in its third year with a supply glut. The combined 1.758 million bpd in production cuts, to run for the first six months of the year, were expected to bring the market into a production-demand balance midyear.
Doubt emerged that the cuts would be that successful, with skeptics pointing to the history of cheating by some OPEC members and non-OPEC producer Russia, which in the past has walked away from commitments. Moreover, OPEC members Libya and Nigeria are not part of the agreement, and are actively attempting to increase their output. Potentially the biggest threat to the quick rebalancing is the United States, which last week produced at an 8.946 million bpd rate, a nine-month high, with output expected to continue higher.
In their Short-term Energy Outlook released Tuesday, the Energy Information Administration discussed these concerns, indicating large drawdowns from bloated inventory might be delayed until mid-2018.
However, reports that Saudi Arabia and Russia have reduced production reassured speculators, triggering a wave of buying. Oil futures have nearly erased all of Monday and Tuesday's losses early Thursday.
At 9:00 AM ET, NYMEX February West Texas Intermediate futures were up 87cts at $53.12 bbl, and March crude on the IntercontinentalExchange were $1.01 higher at $56.11 bbl. NYMEX February ULSD futures were up 2.87cts at $1.6811 gallon, with the February RBOB contract 2.77cts higher at $1.6206 gallon.
Also lending upside support is a weakening dollar, which slumped to a more than one-month low in index trading this morning, with the dollar and crude oil having an inverse relationship.
Traders are also factoring in demand from China after a surge in vehicle sales. The Wall Street Journal reports that more than 24 million vehicles were sold in China in 2016, up 15% from year prior, and the fastest sales pace in three years. However, vehicle sales are expected to slow sharply this year from the 2016 pace because of easing tax incentives. China is now the largest market for cars.
Brian L. Milne can be reached at email@example.com
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