Oil prices rise as OPEC output cuts drain stocks

Goldman Sachs analysts are concerned that an ramp up of US oil production in a market only starting to rebalance could lead to another supply glut and another drop in oil prices. Shell photo.

Increase in oil prices spurs more US drilling, production

By Scott DiSavino

NEW YORK, Jan 24 (Reuters) – Oil prices edged higher on Tuesday ahead of weekly U.S. inventory data on evidence the global market is tightening as lower production by OPEC and other exporters drains stocks.

Increased drilling in the United States, however, could keep a lid on prices.

Brent futures gained 21 cents, or 0.4 per cent, to settle at $55.44 a barrel, while U.S. West Texas Intermediate gained 43 cents or 0.8 per cent, to $53.18 per barrel.

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That put WTI up for a fourth day in a row, its longest winning streak since the end of December.

Ministers from the Organization of the Petroleum Exporting Countries (OPEC) and big producers outside the group said on Sunday that of the almost 1.8 million barrels per day (b/d) they had agreed to remove from the market starting on Jan. 1, 1.5 million b/d had already been cut.

Saudi Arabia’s oil output is likely to drop to around 9.9 million b/d in January, according to industry sources and shipping data. The kingdom said it pumped 10.47 million b/d in December.

“The comments out of OPEC are the primary reasons for the price increase on Tuesday. That and recent weakness in the dollar, which is actually masking some serious weakness in oil,” said Phil Davis, managing partner at PSW Investments in Woodland Park, New Jersey.

The U.S. dollar settled at a seven-week low against a basket of currencies on Monday, but was up nearly 0.15 per cent Tuesday afternoon. A weaker greenback makes dollar-denominated crude less expensive for users of other currencies.

Bernstein Energy said global oil inventories declined 24 million barrels to 5.7 billion barrels in the fourth quarter of last year from the previous quarter. This amounts to about 60 days of world oil consumption.

“This is the biggest quarterly decline since the fourth quarter of 2013, confirming that inventory builds are now reversing as the market shifts from oversupply to undersupply,” Bernstein analysts said in a note to clients.

Analysts, however, estimated U.S. crude stocks increased by about 2.8 million barrels in the week to Jan. 20.

The American Petroleum Institute (API) is scheduled to release data at 4:30 p.m. EST, while the Energy Information Administration (EIA) report is due at 10:30 a.m. EST on Wednesday.

The push by Republicans in the U.S. House of Representatives for a shift to border-adjusted corporate tax (BTA) could push WTI prices higher than Brent, triggering large-scale domestic production, according to analysts at Goldman Sachs.

“We expect WTI could move to a $10 per barrel premium to Brent from a $3 discount – a $13 (+25 per cent) relative move immediately.”

Brent’s premium to WTI narrowed on Tuesday by about 26 cents to $2.22 per barrel.

U.S. drillers last week added the most rigs in nearly four years, data from energy services company Baker Hughes showed on Friday, extending an eight-month drilling recovery.

“OPEC is gradually coming to the realization that they may have received more than they bargained for in re-activating U.S. drilling activity,” Jim Ritterbusch, president of Chicago-based energy advisory firm Ritterbusch & Associates, said in a note.

U.S. oil production has risen by more than 6 per cent since mid-2016, though it remains 7 per cent below the 2015 peak. It is back to levels reached in late 2014, when strong U.S. crude output contributed to a crash in oil prices.

(Additional reporting by Christopher Johnson in London and Naveen Thukral in Singapore; Editing by David Goodman and Lisa Shumaker)