Oil Future Jump on OPEC Reports

OLD BRIDGE, N.J. (DTN) -- Oil futures nearest to delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange reversed recent declines and moved sharply higher on reports that the Organization of the Petroleum Exporting Countries and 10 non-OPEC members led by Russia will leave existing oil production cuts in place.

The announcement follows earlier reports citing OPEC member Saudi Arabia and non-OPEC leader Russia as discussing their intent to hike oil production between 300,000 barrels per day (bpd) and 800,000 bpd amid steep output losses from Venezuela and in response to the potential effects of renewed sanctions on Iran. The announcement comes ahead of OPEC's biannual meeting on June 22 in Vienna.

The existing cuts, which trimmed output by 1.8 million bpd against October 2016 levels, were enacted to reduce a perceived world oil supply glut. In defense of its position to potentially raise output, OPEC said earlier much of the previous oil glut that caused prices to tumble in early 2016 has since disappeared and markets were more "stable."

Wednesday's rising futures values follow recent steady price declines to three-week lows or more that began May 23 after weekly supply reports showed an unexpected U.S. supply build amid initial reports by OPEC and non-OPEC members that they were considering steps to boost production as Brent crude prices advanced through the psychological $80 per barrel (bbl) level.

Traders say a combination of the re-imposition of Iranian sanctions and plummeting production in Venezuela -- down 531,000 bpd or 27% year-on-year in April at 1.436 million bpd and now seen declining below 1.0 million bpd by year-end -- are said to have prompted the OPEC decision to consider easing their production agreement, which runs through year-end.

It remains unclear whether recent actions by ConocoPhillips to seize PDVSA terminal and oil storage assets in the Caribbean and recent actions by the Trump administration to bar the purchase and sale of Venezuelan government debt, including new debt issued by PDVSA and the central bank would prompt others to do likewise, further escalating the risk for additional Venezuelan production losses later this year and in 2019.

At the 2:30 p.m. EDT settlement, NYMEX July West Texas Intermediate futures settled $1.48 bbl higher to $68.21 bbl, reversing off Tuesday's $65.80 six-week low on the spot continuation chart. August WTI futures gained $1.46 bbl on the day to settle at $68.08 bbl.

ICE July Brent settled $2.11 higher to $77.50 bbl, while August Brent gained $2.23 bbl to $77.22 bbl ahead of the July contract's expiration end-day Thursday.

NYMEX June RBOB futures settled 4.01 cents higher to $2.1842 gallon ahead of the contract's expiration at Thursday's close. July RBOB futures settled up 3.53 cents at $2.1724 gallon in the seasonally backwardated market.

NYMEX June ULSD futures settled 4.58 cents higher to $2.2317 gallon while July ULSD futures settled up 4.447 cents at $2.2255 gallon ahead of the June contract's expiration Thursday afternoon.

Futures values also are being propped up on expectations that Wednesday's 4:30 p.m. EDT supply report from the American Petroleum Institute would show declines in crude oil, distillate and gasoline inventories, and on potential short covering ahead of Thursday's June contract expirations for June RBOB and ULSD, traders said. Thursday's 11:00 a.m. EDT Energy Information Administration weekly supply report also is expected to drive July futures, especially short-covering ahead of contract expirations.

Traders note the widening spread between WTI and Brent crude at more than $9 bbl, its highest level since February 2015. The spread has been widening steadily since early March when it stood at less than $3 bbl. Traders say the gap between the two global oil benchmarks is evidence of growing oil demand and rising geopolitical tensions while U.S. crude production continues to soar.

Light shale oil production from the Permian Basin of West Texas is, however, unlikely to fully satisfy growing domestic and international demand any time soon. Analysts note access to the market remains constrained by ongoing pipeline bottlenecks and because many refineries in the U.S. Gulf Coast and elsewhere are engineered to process heavier grade crudes.

Brian Whary can be reached at brian.whary@dtn.com