Oil Prices Near Two-Year Highs as Supply Cuts Bite

Oil prices eased on Tuesday after a week of gains as the prospect of increasing U.S. exports dampened bullish sentiment that has driven Brent to more than two-year highs above $60 per barrel.

Iraq’s move to increase oil exports from its southern ports by 220,000 barrels per day (bpd) to 3.45 million bpd to make up for supply disruptions from its northern Kirkuk fields also weighed on prices, traders said.

Benchmark Brent LCOc1 was down 30 cents at $60.60 a barrel by 0855 GMT, not far off July 2015-highs reached earlier this week, and up around 37 percent since their 2017 lows last June.

U.S. light crude CLc1 was 15 cents lower at $54, still near its highest since February and also not far off its highest for more than two years.

Traders and brokers said investors were adjusting positions after price rises of around 5 percent in October.

Despite generally upbeat sentiment, some analysts also warned the market was overbought, having risen too far, too fast.

“U.S. shale output could keep a lid on prices over the medium to long-term,” said Shane Chanel, equities and derivatives adviser at ASR Wealth Advisers.

U.S. light crude has been trading at a discount of around $6.70 to Brent CL-LCO1=R making it attractive to refiners.

U.S. crude production C-OUT-T-EIA has risen almost 13 percent since mid-2016 to 9.5 million barrels per day (bpd).

“The large differential has opened the door on regional arbitrage, driving a spike in U.S. crude exports over recent weeks,” BMI Research said in a note.

Despite Tuesday’s price dip, sentiment remained positive, fueled by a pledge by the Organization of the Petroleum Exporting Countries, Russia and other exporters to hold back about 1.8 million barrels per day (bpd) in oil production to tighten markets.

While the actual cuts aren’t quite as high as the target, analysts say overall compliance has been strong.

“The OPEC deal compliance has been very firm, with rates averaging 86 percent since January,” according to Bank of America Merrill Lynch.

The pact runs to March 2018, but Saudi Arabia and Russia have voiced support to extend the agreement.

OPEC is scheduled to meet officially at its headquarters in Vienna, Austria, on Nov. 30.

“The fear of oversupply could easily turn to a fear of undersupply if inventories keep declining like they have been and demand continues to grow,” said William O‘Loughlin, investment analyst at Rivkin Securities.

Reuters

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell