Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
[George Orwell, DTN Energy][3/27/17]
New York Mercantile Exchange spot-month oil futures settled mixed Monday afternoon after the West Texas Intermediate and ULSD contracts tested last week’s lows amid concern over increasing U.S. crude production.
Talk that the Organization of the Petroleum Exporting Countries is now open to extending their oil production cuts through the rest of 2017 limited the losses for crude futures while refined products contracts found support from expectations for another weekly stock draw, said analysts.
The domestic crude supply glut was highlighted by the Baker Hughes, Inc. report Friday showing the number of active rigs for oil drilling in the United States increased for the tenth week in a row, up 21 to an 18-month high of 652 last week and 280 higher year-over-year, signaling continued increases in domestic production.
U.S. production jumped 20,000 barrels per day (bpd) to a better-than one-year high of a 9.129 million bpd while total inventories were at a 533.2 million barrel (bbl) record high as of the week-ended March 17, the latest data from the Energy Information Administration shows.
Higher U.S. crude production has limited OPEC’s ability to reduce a global oil surplus, which triggered speculative liquidation of long positions in oil futures over the past two weeks.
On Sunday, a five-member joint technical committee made up of OPEC members Kuwait, Algeria and Venezuela and non-OPEC countries Russia and Oman met in Kuwait to monitor compliance with nearly 1.8 million bpd in output cuts by OPEC and their 11 non-OPEC partners. They determined compliance with their agreement increased 8% from January to 94% in February.
Several OPEC members expressed a willingness to extend the production cuts if Russia would go along with the extension. Russia was less definitive, with its Energy Minister Alexander Novak saying it is too early to make that decision.
“Even though Russia is refusing, the fact that major OPEC countries want to extend the cuts is positive,” said analyst Phil Flynn at Price Futures.
The joint technical committee monitoring compliance is now expected to deliberate an extension at its April meeting, when global inventories are still expected to be well above their five-year average.
“It is positive talk, but it’s not concrete, and in fact Goldman Sachs is bearish on it,” said Tom Bentz, vice president for energy derivatives at ABN AMRO.
Goldman Sachs, the Wall Street investment giant, warned in a report today that extending the OPEC production cuts would backfire. The bank said such a move would support oil prices in the short-term but also encourage non-OPEC producers to ramp up their production, which would, in turn, depress oil prices later.
The oil market was also influenced by trading in the equities market today, analysts said, with Dow Jones Industrial Average paring early losses after tumbling 160 points on concern President Donald Trump’s tax cuts might have trouble passing through Congress after the failure of healthcare bill last week.
At settlement, May NYMEX West Texas Intermediate futures eased 24 cents to $47.73 bbl, testing March’s $47.01 low with a $47.08 intraday low. IntercontinentalExchange May Brent crude futures were little changed, settling down 5 cents at $50.75 bbl. In arbitrage trade, Brent traded at a $3.03 bbl premium over WTI, up 20 cents from Friday’s close.
In products trade, NYMEX April ULSD futures were little changed, eking out a 0.49-cent gain to $1.5025 gallon and NYMEX April ULSD futures gained 1.41 cents to $1.6189 gallon.
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