CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange rallied into the close on late session news Saudi Arabia will cut crude exports to the United States, as they reduce crude output in alignment with a production agreement reached last week by the Organization of the Petroleum Exporting Countries, Russia and nine non-OPEC oil producers.
Oil futures had meandered in range bound trade for most of the session, at times moving with mixed trading in U.S. equities before rallying in the minutes leading up to the close on news of the Saudi plan. Earlier this week, news broke that the Saudi crude exports would drop 1.0 million barrels per day (bpd) from November rates to 7.3 million bpd in January.
The Saudis targeting reduced exports to the United States are unlikely to create a tight U.S. market. U.S. crude imports in the fourth quarter are running below year ago and the five-year average at 7.535 million bpd and domestic crude production is near a record high at 11.6 million bpd in early December, data from the Energy Information Administration shows. Moreover, oil is an international commodity.
The plan has history, however, with the Saudis previously targeting lower exports to the United States when global oil inventories were at surplus levels during 2015 through 2017 in an effort to prompt inventory drawdowns. Oil data from the United States is transparent and closely followed by the markets, whereas oil data from many other countries is opaque. Big inventory builds of crude oil in the United States would frequently trigger sell offs not only in U.S. crude prices, but also the international benchmark Brent contract.
During the Vienna agreement reached in late 2016, OPEC indicated its goal was to reduce commercial oil inventory by the 35-country bloc Organization for Economic Cooperation and Development below the five-year average. That finally occurred in March. The International Energy Agency this morning said OECD commercial oil inventory increased for the fourth consecutive month in October, with a 5.7 million barrels (bbl) build again pushing stocks above the five-year average to 2.872 billion bbl.
The OPEC+ agreement reached on Dec. 7 calls for 1.2 million bpd in production cuts for the first half of 2019, with OPEC's share at 800,000 bpd. OPEC didn't provide a country breakdown of quotas, although media reports indicate Saudis are responsible for 250,000 bpd of the cut. On Wednesday, Saudi crude production for November was reported at a record high 11.016 million bpd, with the kingdom last month indicating they would cut 500,000 bpd in December. It's unclear how many barrels will be reduced from November's output rate in January.
Last week's muddled communication in announcing the production cuts has diluted the bullish effect on crude prices, which are trading at price levels seen leading up to the meeting. A lack of unity in OPEC has some in the market questioning if the production cuts will be fully undertaken, triggering selling earlier this week. Uncertainty over world economic growth in 2019 driven largely by global trade tensions has also triggered bouts of selling, as sluggish economic growth would cut into demand for oil.
Ahead of the Saudi news, oil futures did find support on strong demand by the United States, even if gasoline demand growth has slowed against year ago. Total oil products supplied to the U.S. market averaged 20.703 million bpd this year through Dec. 7, EIA data shows, up 615,000 bpd or 3.1% against the comparable year-ago period.
At settlement, Nymex January West Texas Intermediate futures were up $1.43 at $52.58 bbl, with ICE February Brent $1.30 higher on the session at $61.45 bbl. Nymex January ULSD futures were 2.56 cents higher at $1.8765 gallon and January RBOB futures rallied 5.78 cents to $1.4782 gallon.
Brian Milne can be reached at Brian.Milne@dtn.com
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