Oil Retreats From 17-Month High After Report of U.S. Supply Gain

  • API said to report that supply rose 4.2 million barrels
  • Iraq, Venezuela to implement production cuts on Jan. 1

What Are the Prospects for OPEC Enforcement?

Oil futures fell from the highest close in 17 months as an industry report was said to show U.S. crude stockpiles climbed last week.

Futures retreated 45 cents from the close after the American Petroleum Institute said late Tuesday that nationwide crude inventories rose 4.2 million barrels last week, according to a person familiar with the data. Analysts surveyed by Bloomberg project a government report Thursday will show a supply decline. West Texas Intermediate oil settled higher for an eighth straight session, capping the longest stretch of gains in seven years as optimism mounts that major producers will make good on output-cut pledges in January.

"It looks like U.S. refineries sharply cut back on runs last week, which would explain the unexpected build in U.S. crude supplies and the fall in products," Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. "That’s what the American Petroleum Institute says, but that might not be what’s shown tomorrow in the weekly petroleum status report."

Oil has climbed since the Organization of Petroleum Exporting Countries agreed last month to curb production for the first time in eight years, along with another 11 producing nations. The market is now shifting focus to the group’s compliance toward the targeted reductions. Money managers have reduced their bets on falling West Texas Intermediate crude prices to the lowest level since August 2014 in anticipation of reduced supply. The rally has encouraged drilling of new wells in the U.S. shale patch.

WTI for February delivery traded at $53.66 a barrel at 4:58 p.m. on the New York Mercantile Exchange, after touching $53.61. Futures fell from a close at $54.06, the highest since July 2, 2015. Total volume traded was about 50 percent below the 100-day average at 4:58 p.m. Prices are up 45 percent this year.

Sweet Spot

Brent for February settlement rose 13 cents to $56.22 a barrel on the London-based ICE Futures Europe exchange. It’s the highest close since July 2015. The global benchmark tended the session at a $2.16 premium to WTI.

The Energy Information Administration report on Thursday will probably show that U.S. crude stockpiles fell by 1.5 million barrels last week, according to a Bloomberg survey of analysts. Inventories of gasoline and distillate fuel, a category that includes diesel and heating oil, probably rose.

"The $50 to $60 area is the sweet-spot range for oil in 2017," Cavan Yie, senior equity analyst at Manulife Asset Management Ltd. in Toronto, said by telephone. "There’s been talk of the U.S. production response defeating this rally, but I think the threat has been overstated."

See also: One group of oil investors didn’t cash in on crude’s 2016 rally

Iraqi Oil Minister Jabbar al-Luaibi said his country was committed to cutting output by 200,000 to 210,000 barrels a day from the beginning of next month, Kuwait’s state-run news agency KUNA reported. Venezuela will cut 95,000 barrels a day of production starting Jan. 1, according to the country’s oil ministry.

Monitoring Committee

A monitoring committee consisting of some OPEC nations and non-members will meet on Jan. 21-22 in Vienna, said Kuwait Oil Minister Essam Al-Marzouk, KUNA reported. OPEC Secretary-General Mohammad Barkindo has earlier said the meeting would take place on Jan. 13 in Abu Dhabi.

"We’re seeing more of an urgency and willingness by the participants in the cuts than has been the case in the past," Mark Watkins, the Park City, Utah-based regional investment manager for the Private Client Group at U.S. Bank, which oversees $136 billion in assets, said by telephone. "If there’s greater than usual compliance with production cuts in January, that could set the tone for the oil price going forward into 2017."

Global crude inventories should return to equilibrium, stabilizing the market, as the agreed cuts go into effect, Venezuelan Oil Minister Eulogio Del Pino said Tuesday on state television. Brent should stabilize between $60 and $70 a barrel as inventories return to equilibrium, Del Pino said.

Oil-market news:

  • BP Plc will pay A$1.785 billion ($1.3 billion) for Woolworths Ltd.’s network of Australian gas stations in a deal that will cement the London-based oil company as one of the nation’s biggest fuel providers.
  • Tanker Valtamed is set to arrive Wednesday to load 630,000 barrels of crude at Libya’s Hariga port, according to Adnan Omran, general manager of Al Omran International Maritime Agencies.
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