Oil Rises to Two-Week High With Equities Amid Output Freeze Talk

Oil Freeze: Locking In High Supplies, Low Prices
  • Iran, Iraq should be allowed to recover market share: Nigeria
  • IEA sees global glut staying in 2017, capping price recovery

Oil rose to the highest in more than two weeks in New York as global equities rallied amid speculation that a production freeze by some OPEC members and Russia could eventually help to abate the market surplus.

Futures climbed 6.2 percent. The Standard & Poor’s 500 Index extended its best week of 2016. Iran was “constructive” on the deal struck last week to limit output, although it hasn’t said whether it may join the pact, Russian Energy Minister Alexander Novak told state TV on Saturday. The global surplus will last into 2017, longer than previously reported amid resilient U.S. shale output, the International Energy Agency said.

"A lot of the economic concerns that have weighed on markets this year have eased, at least in the U.S., because of positive data," said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. "There are a lot of nervous shorts in the market. There’s been a rush to call a bottom several times and that’s happening here."

Crude is still down 15 percent this year on speculation that a worldwide surplus will persist amid the outlook for increased Iranian exports after the removal of sanctions and brimming U.S. stockpiles. Saudi Arabia, Russia, Venezuela and Qatar reached a preliminary agreement in Doha last week to freeze output at January levels if other states join them.

Exceeding Demand

West Texas Intermediate oil for March delivery, which expired Monday, climbed $1.84 to settle at $31.48 a barrel on the New York Mercantile Exchange. It was the highest close since Feb. 4. Total volume traded was 11 percent above the 100-day average at 2:55 p.m. The more-active April contract advanced $1.64 to $33.39 a barrel.

Brent for April settlement increased $1.68, or 5.1 percent, to $34.69 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $1.30 premium to the April WTI contract.

Energy companies were nine of the 10 biggest gainers on the S&P 500 Monday. The S&P 500 Oil & Gas Exploration and Production Index rose 4.9 percent.

Global supply will continue to exceed demand until 2017 as improved efficiency tempers the pullback in U.S. shale oil production, the Paris-based IEA said in its medium-term market report. The agency boosted world demand estimates through the rest of the decade, and lowered projections for non-OPEC supply, signaling that OPEC will have some success in regaining market share even if prices remain subdued.

Good Start

“The market is going toward stabilization,” Chakib Khelil, former Algerian minister of energy, said in an interview with Bloomberg Television. “Saudi Arabia has achieved its objective to cut non-OPEC production” and the output freeze is “a good start that we can build on” to rebalance the market, he said.

The agreement to freeze output includes Qatar and Venezuela and is the “beginning of a process” that could require “other steps to stabilize and improve the market,” Saudi Oil Minister Ali al-Naimi said after the talks last week. The kingdom pumped 10.2 million barrels a day last month, according to data compiled by Bloomberg. Russia produced 10.9 million, a post-Soviet record.

OPEC Comments

While Nigeria, a fellow a member of the Organization of Petroleum Exporting Countries, backs the freeze, Iran and Iraq should be allowed to recover lost market share, Minister of State for Petroleum Resources Emmanuel Kachikwu said Sunday.

Tumbling prices have hurt earnings and curbed investment. Goldman Sachs Group Inc. said about 40 percent of its loans and lending commitments to oil and gas companies are to junk-rated firms. The figure, which counts both loans made and future promises to lend, accounted for $4.2 billion of a total $10.6 billion as of the end of December, the bank said Monday in its annual regulatory filing. Goldman Sachs has $1.5 billion in loans to energy companies rated below investment grade and $2.7 billion in unfunded commitments.

Rigs targeting oil in the U.S. fell by 26 to 413, the lowest number of active machines since December 2009, according to Baker Hughes Inc. The nation’s stockpiles have swelled to more than 500 million barrels, the most since 1930, according to Energy Information Administration data.

"The rig count is really down in the U.S.," Kilduff said. "It’s obvious that a supply reaction to the drop in prices is underway in the U.S."

Speculators’ long positions in WTI futures and options fell by 5.3 percent during the week ended Feb. 16, according to U.S. Commodity Futures Trading Commission data, the biggest decline in seven months. Longs slid by 16,146 contracts to 286,238. In the Brent market, speculators boosted net-longs by 7.4 percent to 284,873 contracts.

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