Oil Futures End Higher on Saudi Rumor

NEW YORK (DTN) -- New York Mercantile Exchange spot-month oil futures rallied Tuesday ahead of weekly oil data from the American Petroleum Institute. That data is expected to show a weekly U.S. stock draw in crude oil amid improving demand, and on speculation Saudi Arabia was considering a further unilateral cut to its production.

However, the spot-month contracts settled off highs for the session, paring their gains after Ecuador broke ranks with fellow members of the Organization of Petroleum Exporting Countries regarding the ongoing production cuts.

Ecuador's oil minister Carlos Perez said they could no longer hold up their end of an agreement to cut oil production due to the country's financial needs. The South American nation pledged to cut its output by 26,000 bpd and produced 528,000 bpd in May.

Ecuador is among the smallest OPEC producers that pledged, along with others and 10 non-OPEC nations, to cut 1.8 million bpd in production from January 2017 through March 2018. Saudi Arabia is the largest oil producer within OPEC and generally dictates cartel policy.

"While Saudi Arabia certainly has the ability to take stronger action on its own, such a move would raise expectations that the kingdom would become solely responsible for balancing the market on an ongoing basis, a precedent we think they would be most reluctant to set," said analyst Tim Evans at Citi Futures in New York.

He added, "While all options may be on the table, a unilateral [output] cut would be the last one the Saudis pick up. Instead, we think they will continue to work to encourage group action, both within OPEC and with non-OPEC allies such as Russia. Ecuador's announcement that it will increase output is small in terms of the barrels involved, but it does reveal some cracks in the OPEC coalition."

The futures complex was further supported by a weak dollar, with the dollar index slumping to an 11-month low. Oil and the U.S. currency often trade inverse to each other.

On domestic supply, the API will issue its oil data for the week-ended July 14 at 4:30 PM ET, while the Energy Information Administration's oil report is scheduled for release at Wednesday morning.

The market expects the reports to show U.S. crude oil inventories were down by 3.0 million bbl last week, while gasoline supply is seen 1.0 million bbl higher and distillate fuel inventories are projected to have climbed by 1.5 million bbl.

Recent EIA data showed domestic crude stockpiles steadily falling amid improved seasonal demand.

At settlement, NYMEX August West Texas Intermediate crude futures were up 38cts at $46.40 bbl, paring gains after rallying earlier to a two-week spot high of $46.92 and challenged resistance at $47.02. The IntercontinentalExchange September Brent crude futures contract was up 42cts at a $48.84 bbl settlement, off a two-week high of $49.41.

The August ULSD futures contract settled 1.09cts higher at $1.5104 gallon, off a six-week high of $1.5259. August RBOB futures climbed 2.22cts to $1.5789 gallon at settlement, off a six-week spot high of $1.5926 and trading at a 3.81cts premium to the September contract.

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