Oil Pares Biggest Quarterly Gain Since 2009 Amid Rebalancing

Oil Producers Drill Deeper as Investors Search for Yield
  • WTI surges 26% in second quarter as global supply glut easing
  • Crude market whipsawed since U.K. vote to leave EU on June 23

Oil capped the biggest quarterly advance in seven years as falling U.S. supply added to speculation the global surplus is easing.

QuickTake Oil Prices

West Texas Intermediate oil climbed 26 percent this quarter, even after a 3.1 percent decline Thursday. U.S. crude supplies shrank a sixth week and output slipped to the lowest since September 2014, government data showed Wednesday. Markets have whipsawed after the U.K.’s vote to leave the European Union on June 23. Goldman Sachs Group Inc. said that a recovery in Nigerian production is a risk to its $50-a-barrel forecast for the second half of 2016.

"The fundamentals are not as supportive as they may seem at first glance," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. "The cease-fire in Nigeria is putting downward pressure on the market. The return of the Nigerian oil production would take away one of the biggest supports of the market over the last several weeks."

Supply disruptions and falling U.S. output have helped cut a global surplus, sparking a rally of more than 85 percent since prices hit a 12-year low in February. Both the International Energy Agency and the Organization of Petroleum Exporting Countries forecast this month that the market is heading toward balance as demand growth outpaces supply.

WTI fell $1.55 to settle at $48.33 a barrel on the New York Mercantile Exchange. The contract slipped about $1 in the last 10 minutes of trading. Futures capped the biggest quarterly decline since June 2009. Total volume traded was 13 percent below the 100-day average at 2:45 p.m.

U.S. Stockpiles

Brent for August settlement, which expired Thursday, fell 93 cents, or 1.8 percent, to $49.68 a barrel on the London-based ICE Futures Europe exchange. Prices increased 25 percent this quarter. The more-active September contract fell $1.61 to $49.71 a barrel. Front-month Brent futures closed at a $1.35 premium to WTI.

"We’ve had huge resistance at $50, and when we failed to break through the shorts came in," said Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston. "It looks like the move at the end of trading was due to the end of the quarter."

U.S. crude supplies fell to 526.6 million barrels, the lowest since the week ended March 11, the Energy Information Administration said. Stockpiles climbed to an 87-year high of 543.4 million barrels in the last week of April. Production slipped by 55,000 barrels a day to 8.62 million last week, the EIA said.

Nigerian Supply

If a cease-fire between Nigeria’s government and militants is sustained, output could climb, with officials "optimistically” predicting a return to normal levels by the end of July, Goldman Sachs analysts including Damien Courvalin wrote in a note dated June 29. The return of barrels poses a risk to the bank’s price outlook as it would bring the global oil market close to balance over the final six months of the year, instead of the deficit it currently projects.

"Oil producers are trying to grab all the market share they can right now," said Dave Anderson, head of credit and political risk at Zurich Insurance in Washington.

Saudi Arabia, the world’s largest crude exporter, cut pricing for its August oil sales to Asia and the U.S. State-owned Saudi Arabian Oil Co. lowered its official selling price for all grades to Asian and U.S. customers, the company known as Saudi Aramco said in an e-mailed statement Thursday. Middle Eastern producers are competing with cargoes from Latin America, North Africa and Russia for buyers in Asia, its largest market.

Oil-market news:

  • The Norwegian Oil and Gas Association says 12 percent of the nation’s output would be halted if mediation efforts fail and workers strike.
  • Energy Transfer Equity LP terminated its agreement to buy Williams Cos. after 18 months of negotiations, leaving Williams to carry on as a standalone company and Energy Transfer to seek options for growth. 
  • China’s accelerated filling of its emergency oil reserve since early-2015 amid low oil prices has pushed storage capacity to its limit, adding to risks for oil, JPMorgan analysts led by Ying Wang said in a research note.
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