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Oil Surges to Four-Month High as Russians, Saudis Seen Agreeing

Updated on
  • Saudi Arabia, Russia reach consensus on oil freeze: Interfax
  • U.S. shale output heading for two-year low, EIA says in report

The New Normal for Oil and OPEC

Crude climbed to the highest level in more than four months as Saudi Arabia and Russia were seen agreeing on a potential production freeze.

Oil rose 4.5 percent in New York. Saudi Arabia and Russia have reached a consensus on an output freeze, Interfax said Tuesday, citing an unidentified “informed diplomatic source” in Doha. "There is hope" that an agreement can be reached regardless of Iran’s position, said Dmitry Peskov, the Kremlin’s press secretary. OPEC members will meet with other major producers, including Russia, to discuss capping production in the Qatari capital on April 17. 

"The market has clearly shifted to the view that an agreement will be reached," said Mike Wittner, head of oil markets at Societe Generale SA in New York. "There are talks going on behind the scenes, and occasionally we get bits of information. People are going to trade on these bits of news."

Oil has rebounded after falling to the lowest level in more than 12 years amid signs a global glut will ease as U.S. output declines. Saudi Arabia, the biggest OPEC producer, said previously it would agree to a cap only if it’s joined by other suppliers including Iran, while Kuwait said a deal can be done without Tehran’s support. While Iran will attend the talks, it has ruled out limiting supply as it restores exports after sanctions were lifted in January.

WTI, Brent

West Texas Intermediate for May delivery rose $1.81 to settle at $42.17 a barrel on the New York Mercantile Exchange. It was the highest settlement price since Nov. 25. Total volume traded was 63 percent above the 100-day average at 4:40 p.m.

Gains eased after the settlement when the American Petroleum Institute was said to report U.S. crude supplies rose 6.2 million barrels last week. WTI traded at $41.60 at 4:40 p.m.

Brent for June settlement advanced $1.86, or 4.3 percent, to $44.69 a barrel on the London-based ICE Futures Europe exchange. It was the the highest close since Nov. 27. The global benchmark ended the session at a $1.19 premium to WTI for June delivery.

WTI closed above the 200-day moving average, which stood at $41.04, for the first time since July 2014. Technical traders look at a settlement above the 200-day moving average as signal for further upward movement.

"We’re going to see a lot of back and forth whipsawing the market ahead of the meeting," said Matt Sallee, who helps manage $13.5 billion in oil-related assets at Tortoise Capital Advisors in Leawood, Kansas. "I wouldn’t be surprised if prices fall Monday."

Soft Agreement

Russian Energy Minister Alexander Novak briefed Russian President Vladimir Putin on latest talks with Saudi Arabia, Peskov said, without saying when talks took place. Novak spoke to Saudi Petroleum Minister Ali al-Naimi by phone on Tuesday to discuss prospects for a deal on the freeze at the Doha meeting, a person with direct knowledge of the matter said.

The likely outcome on April 17 will be “a soft agreement which would not really do anything to fundamentals,” Jeff Currie, head of commodities research at Goldman Sachs, said in a Bloomberg Television interview. Anything stronger is “not in anybody’s interest right now,” Currie said

The Organization of Petroleum Exporting Countries’ next scheduled meeting is on June 2 in Vienna.

"The markets could be thinking freeze in April, maybe cut in June," Societe Generale’s Wittner said.

Declining Output

Prices climbed earlier as forecasts for lower U.S. shale production signaled the global glut will slowly diminish. Output from U.S. shale formations will drop to 4.84 million barrels a day in May, the lowest in almost two years, a report Monday from the Energy Information Administration showed. The EIA cut its 2016 U.S. oil production forecast to 8.6 million barrels a day from 8.67 million forecast in March, according to its Short-Term Energy Outlook on Tuesday.

"Prices are up on speculation that market tightening is under way," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut. "The productivity report yesterday shows that shale production will drop. There are also hopes that a production deal will be reached at this weekend’s meeting."

Still, American crude supplies probably rose last week, remaining near the highest level since 1930, a Bloomberg survey showed. The stockpiles probably increased by 1 million barrels, according to the survey before an EIA report Wednesday. Gasoline supplies are projected to decline 1.5 million barrels.

Gasoline for May delivery climbed 1.8 percent to $1.5343 a gallon, the highest settlement since August. Diesel for May delivery increased 5 percent to $1.2759, the highest close since Dec. 7.

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