Futures Movers: Oil settles higher on hopes supply cuts, reopening economies will drain crude glut

Saudi Arabia has promised to cut an additional 1 million barrels per day in June, in addition to its share of reductions under the output-cut agreement between the Organization of the Petroleum Exporting Countries and its allies, including Russia.

Reuters reported Tuesday that OPEC+ wants to continue their existing oil production cuts beyond June, citing four OPEC+ sources. The agreement between the group of producers, known as OPEC+, called for output reductions of 9.7 million barrels per day from May 1 through June, with the group gradually reducing the size of the cuts after that, through April 2022.

West Texas Intermediate crude for June delivery CL.1, +6.83%CLM20, +6.83% rose $1.64, or 6.8%, to settle at $25.78 a barrel on the New York Mercantile Exchange. That was the highest finish for a front-month contract since April 6, according to Dow Jones Market Data. July Brent crude BRN.1, -0.10%BRNN20, -0.10%, the global benchmark, added 35 cents, or 1.2%, t0 $29.98 a barrel on ICE Futures Europe.

Saudi oil production for June, with the OPEC+ output-cut agreement and the voluntary cuts, will total 7.492 million barrels per day, the Saudi Press Agency reported Monday.

Kuwait and the United Arab Emirates said Monday that they would offer support for the Saudi move by reducing production by 80,000 barrels and 100,000 barrels per day, respectively, in June.

“Now comes word that Russia is making progress on reductions,” said Flynn, in a daily note.

As part of the OPEC+ agreement, Russia reduced its oil and gas condensate production to 9.45 million barrels a day on May 1-11, from an average 11.25 million barrels per day in April, Reuters reported Tuesday, citing sources familiar with the data.

The cuts by the Saudis should not be taken lightly by the market, said Bjornar Tonhaugen, head of oil markets at Rystad Energy, said in daily market commentary. More production curtailments are “a positive indicator for the market, which receives the news as a slight relief to the oversupply it is facing.”

“It’s not that the new cuts are enough to rebalance it—far from that—they are however sufficient to bring the imbalance to more manageable levels in June, and to most likely avoid hitting tank tops in onshore storage,” he said.

Over in the U.S., crude production was poised to see a sizable decline this year versus last year, with the Energy Information Administration forecasting domestic output at an average 11.7 million barrels per day. That would be down 500,000 barrels a day from 2019, it said.

“This forecast is the first annual decline since 2016, and we expect a further decline in 2021 of 0.8 million barrels per day,” Linda Capuano, EIA administrator, said in a statement.

Oil traders were also looking for signs that renewed economic activity is starting to lift demand for gasoline and, in turn, crude. Oil demand cratered as economies virtually closed down in an effort to contain the outbreak.

See: U.S. states start to reopen, ending coronavirus lockdowns

Data Tuesday showed that U.S. consumer prices sank 0.8% in April, led by a decline in gasoline prices at the pump.

On Nymex, June gasoline RBM20, -0.61% fell by 0.6% to 91.85 cents a gallon. June heating HOM20, -4.27% also declined 3.5% to 83.84 cents a gallon.

Oil could find further support if data from the American Petroleum Institute late Tuesday shows a decline in crude oil stocks at the Nymex delivery hub in Cushing, Oklahoma, as was reported last week by a private information provider, said Eugen Weinberg, analyst at Commerzbank, in a Tuesday note.

The EIA’s weekly petroleum supply report will come out early Wednesday.

On average, analysts polled by S&P Global Platts expect the EIA to report a climb of 4.8 million barrels in U.S. crude stockpiles for the week ended May 8. They also expect to see a decline of 2.5 million barrels in gasoline supplies, but distillates are expected to have increased by 4.1 million barrels.

Meanwhile, natural-gas prices dropped as traders expect the EIA on Thursday to report a triple-digit weekly rise in supplies of the fuel, said Christin Redmond, commodity analyst at Schneider Electric. Inventories likely rose around 103 billion cubic feet last week, 18 billion more than the five-year average, she said in a note.

June natural gas NGM20, -6.02% settled at $1.72 per million British thermal units, down 5.8%.

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