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5 Reasons Oil Is On Track For Biggest Monthly Gain In Nearly A Year

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Oil futures are set to score their largest monthly gain in almost a year, even though U.S. crude supplies climbed in each of the last six weeks and major oil producers have yet for formalize a plan to stabilize output.

West Texas Intermediate crude futures CLK6, -3.43%  settled at $39.46 on Thursday, up nearly 17% month to date. A monthly gain of that size would be the largest since April of last year. Markets were closed Friday for the Good Friday holiday.

The biggest factor behind the rise appears to be all the talk over a potential production freeze among major oil producers, but that began in February.

Saudi Arabia, Russia, Qatar and Venezuela said last month that they wouldn’t increase oil output above January’s levels—as long as other major oil producers followed suit. Iran, however, has been clear that it intends to raise production until it reaches its pre-sanctions level, which would add another 1 million or so barrels a day to the market.

Meanwhile, U.S. oil supplies have climbed for the last six weeks in a row to reach total supplies of 532.5 million barrels as of the week ended March 18. That’s a record level, based on weekly data dating back to 1982 from the Energy Information Administration.

So why have oil prices gained so much this month? Here’s a breakdown of the 5 key reasons, according to Robbie Fraser, commodity analyst at Schneider Electric:

Ongoing OPEC speculation

The market has been weighing the likelihood that the Organization of the Petroleum Exporting Countries, or OPEC, will either cut or stabilize production levels to boost prices.

OPEC members and other oil producers were going to meet in March to discuss an agreement to limit output. They’ve decided to meet on April 17 in Doha, Qatar, instead.

The market has been speculation that OPEC will make a move on production since last year, “but somehow it clearly continues to move the market,” Fraser said.

“The cancellation of the much discussed March meeting barely had time to pressure prices lower before the announcement of the meeting in April pulled prices back” up, he said. “The freeze is still essentially meaningless, but if it’s step one before possible cuts at the June meeting, it’s clearly bullish.”

Ongoing U.S. production declines

As of the week ended March 18, total U.S. oil production stood at 9.038 million barrels a day, down 30,000 barrels a day from a week earlier, according to EIA data. Compared with a year earlier, output has fallen 384,000 barrels a day.

“U.S. production certainly hasn’t plummeted, but it’s clearly trending lower,” Fraser said. After peaking at 9.6 million barrels a day last summer, “a string of steady drops are about to bring us below” the 9 million-barrel-a-day level, he said.

Substantial unplanned production outages

Conflicts in parts of the world continue to hurt global output.

“Nigeria and Kurdistan have faced massive outages this year as a result of pipeline disruption,” said Fraser. Outages were “a big issue that didn’t necessarily catch everyone’s attention.”

In Kurdistan alone, some reports estimate 600,000 barrels a day of lost production—“essentially the same decline we’ve seen in U.S. production from last year’s peak,” he said.

Earlier this month, The Financial Times reported that damage caused by an attack on an underwater pipeline could halt flows of Nigerian oil to one of the country’s largest export terminals until May.

Short covering and technical trading

WTI oil prices topped $40 a barrel this month for the first time this year but, so far, has failed to hold above it.

“If you were short oil at the start of 2016, it’d be difficult not to engage in a bit of profit-taking,” Fraser said.

There’s “plenty of risk with multiple OPEC meetings ahead” this year, he said. “That sentiment has been technically reinforced by a break of some long-term trend lines and momentum building for a move higher,” he said.

Seasonality

Strong demand for gasoline has also provided a boost to the demand outlook for oil.

“Summer in the northern hemisphere is peak demand for refined products like gasoline and diesel, and that means refiners are taking in more crude oil to meet it,” said Fraser.

“2016 will likely show record levels of gasoline demand in the U.S., which would provide temporary relief to swelling crude stocks,” he said.


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