Oil Enters Bull Market as OPEC Output-Freeze Optimism Heats Up

Making Sense of the Oil Markets
  • Brent tops $50 a barrel in London for first time since July 4
  • U.S. crude stockpiles unexpectedly drop by 2.5 million barrels

Oil entered a bull market, extending the longest advance in more than a year in New York on speculation major oil producers may act to curb output and as U.S. crude and gasoline inventories declined.

Futures climbed 3.1 percent in New York and Brent closed above $50 a barrel in London for the first time since July 4. OPEC is on course to agree to an output-freeze because its biggest members are pumping flat-out, said Chakib Khelil, the group’s former president. U.S. crude supplies fell the most in five weeks through Aug. 12, while fuel stockpiles slid a third week, Energy Information Administration data show.

Oil has risen more than 20 percent from its early-August low, meeting the common definition of a bull market. Russian Energy Minister Alexander Novak said that the nation was open to discussing a freeze after Saudi Arabian Energy Minister Khalid Al-Falih said informal talks next month may lead to action to stabilize the market. A deal to cap production was proposed in February but a meeting in April ended with no accord.

"This whole rally has been based off of OPEC jawboning, which to their credit, has been quite effective," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.9 billion. "The Saudis are sort of sending a signal that the low $40s for WTI is probably going to be a floor."

West Texas Intermediate for September delivery rose $1.43 to settle at $48.22 a barrel on the New York Mercantile Exchange, the highest since July 1. Futures have increased for six days, the longest run since April 2015. Total volume traded was in line with the 100-day average.

Brent for October settlement advanced $1.04, or 2.1 percent, to close at $50.89 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude settled at a $2.00 premium to WTI for October delivery, after reaching the widest premium since December on Wednesday.

Crude Stockpiles

U.S. crude stockpiles dropped by 2.5 million barrels last week to 521.1 million, the EIA reported Wednesday. That compares with the median forecast in a Bloomberg survey for a 950,000-barrel increase. Gasoline inventories declined by 2.7 million barrels to 232.7 million.

Saudi Arabia, Iran, Iraq and non-member Russia are producing at, or close to, maximum capacity, Khelil said in a Bloomberg Television interview. Khelil steered OPEC in 2008, the last time it implemented an output cut, which was announced in Algeria in December of that year.

Money managers increased wagers on rising crude prices by the most since January during the week ended Aug. 9, according to the Commodity Futures Trading Commission. Bearish bets on crude remain at record high levels.

"Fundamentally there hasn’t been anything that’s drastically changed," said Michael Tran, a commodities strategist at RBC Capital Markets in New York. "We were extremely oversold when we were in the low $40s."

Oil-market news:

  • Saudi Arabia raised its combined crude oil and refined-product exports to 8.83 million barrels a day in June, the highest on record for that month, as reported Thursday by the Riyadh-based Joint Organisations Data Initiative.
  • U.S. gasoline consumption climbed in July to a record, rising 2.4 percent from a year earlier to 9.67 million barrels a day, according to the American Petroleum Institute.
  • U.S. crude output rose by 152,000 barrels a day, in part because of an adjustment to address disparities between weekly and monthly data, according to the EIA’s website.
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