Oil stays above $45/bbl as market steadies

Brent Crude is trading at 45.72 $/bbl this morning after capping gains from yesterday when it reached five months high with energy companies leading equity gains in Asia as traders saw US output drop to the lowest since October 2014.

A note by Goldman Sachs said the market was also buoyed by news from Iraq that oil producers plan new output freeze talks as early as next month.

Crude oil price jumped Wednesday, as traders looked past the current glut to signs of a stronger market ahead and potentially offering relief to beleaguered countries like Nigeria which relies heavily on oil revenues.

Benchmark ICE June Brent futures climbed 4 per cent late in the day to settle at $45.80 per barrel, the highest price since November. Nymex May West Texas Intermediate, the US crude benchmark, climbed 3.8 per cent to $42.63. Crude was below $30 as recently as January.

The sharp gains reflect sturdy global demand and falling output in producers such as the US, where shale energy companies have curtailed drilling in the face of low prices. In what some view as a bullish tell-tale, June Brent is selling for more than the contract for delivery in July, suggesting a clamour for immediate supply.

But the force of the rally surprised observers as it came just three days after leading exporters including Saudi Arabia and Russia failed to agree to freeze production volumes at a meeting in Doha, Qatar.

“Markets may be focusing on steady declines in US crude output, and expectations that this will result in a nearly balanced global market” in the second half of the year, Société Générale said in a note.

The shale drilling boom restored the US’s importance as a global supplier. But in the past year that boom has reversed. The government estimates US crude oil production will fall below 9m barrels per day this month, from a peak of 9.7m b/d a year ago.

A weekly supply report by the Energy Information Administration released on Wednesday showed a mixed picture for domestic oil stocks, but a few data points stood out for the bulls. US petrol demand is running about 4 per cent higher than the same time last year, and the oil refineries were mopping up more than 16m b/d of crude as they met demand from motorists and other fuel consumers.

Markets may be focusing on steady declines in US crude output, and expectations that this will result in a nearly balanced global market

US diesel stocks fell by 4m barrels to 140.9m barrels, helping to propel a 5.5 per cent rally in Nymex diesel futures. Citigroup, in a note, said exports were likely to have caused the decline.

At the same time, US crude stocks swelled another 2.1m barrels to 538.6m barrels, close to record highs. The rise followed a jump in US crude oil imports as fog lifted and enabled ships to unload around the port of Houston, Citi said.

The rally came despite headlines suggesting the world remains awash in oil. In Kuwait, a workers strike that crimped crude supplies has ended. In Russia, the energy minister cast doubt on any deal to throttle back production, including from the OPEC cartel which is next scheduled to meet in June.

Early Thursday, both crude contracts had retreated slightly, with Brent down 46 cents at $45.34 but still well above Nigeria’s budget benchmark of $38 a barrel.