Oil prices jump as output cuts take hold

Published: Jan 26, 2017 11:16 a.m. ET

Natural-gas prices rally as U.S. supplies fall as expected

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Oil futures climbed sharply on Thursday, setting prices up for their best settlement in nearly three weeks, as traders showed growing confidence that major oil producers have been cutting back output as promised.

A rally in U.S. stocks, with the Dow Jones Industrial Average DJIA, +0.09%  and other major indexes at record levels, also fed expectations for higher crude demand, helping to offset concerns surrounding a report released Wednesday that revealed a third-consecutive weekly climb in domestic crude inventories.

Natural-gas futures, meanwhile, looked set to settle at their highest level year to date after a weekly report showed U.S. supplies of the fuel fell as expected.

March West Texas Intermediate crude CLH7, +2.12%  rose $1.21, or 2.3%, to $53.96 a barrel on the New York Mercantile Exchange. A settlement around this level would be the highest since Jan. 6, FactSet data show. Brent crude for March delivery LCOH7, +2.25%  added $1.36, or 2.5%, to $56.44 a barrel.

Some traders assert that “the bearish U.S. inventory data for last week that didn’t kill the market on Wednesday only makes it stronger,” said Tim Evans, energy analyst at Citi Futures, in a note Thursday.

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“Belief that OPEC-led production cuts would quickly or eventually tighten the global oil balance was thus reinforced and money managers, already heavily long the market, reassured,” he said. “We remain concerned that the combination of higher U.S. production and seasonal refinery maintenance will slow the rate of rebalancing to a degree that will lead to a downward correction in prices over the intermediate term, but today is apparently not the day that happens.”

Over the weekend, the Organization of the Petroleum Exporting Countries and Russian officials said they were making good progress on their pledges to cut back oil production—with 24 oil producers making collective cuts totaling 1.5 million barrels a day—over 80% of the total pledged.

Phil Flynn, senior market analyst at Price Futures Group, have focused on recent data from Bernstein Energy showing that global supplies are tightening faster than expected—falling 24 million barrels to 5.7 billion barrels in the fourth quarter of last year from the third quarter.

But the oil market has been concerned that higher prices for oil have contributed to rising crude production in the U.S.

“Oil futures have been trading in a tight range over the last two weeks amid conflicting fundamental forces of positive chatter from OPEC/non-OPEC leadership about successful production cuts and the negative influence of higher trending U.S. production,” said Tyler Richey, co-editor of The 7:00’s Report.

The U.S. Energy Information Administration reported Wednesday that domestic oil inventories rose 2.8 million barrels in the week ended Jan. 20—their third-straight weekly rise.

End-of-month industry shipping and export data, set to be released in the next two weeks, will be the key to figuring out if OPEC and non-OPEC producers are “really complying with their individual quotas and, notably, whether or not Saudi Arabia has cut by more than they pledged,” said Richey.

If the data show compliance, WTI crude could “easily make a swift run towards the $60 mark,” he said.

Back on Nymex, February gasoline RBG7, +1.29%  rose 2 cents, or 1.3%, to $1.543 a gallon and February heating oil HOG7, +1.99%  added 3.5 cents, or 2.2%, to $1.647 a gallon.

Prices for natural gas, meanwhile, continued to climb after EIA data released Thursday showed that supplies of natural gas fell by 119 billion cubic feet for the week ended Jan. 20. That matched the decline expected by analyst polled by S&P Global Platts.

February natural gas NGG17, +3.12%  tacked on 15.3 vents, or 4.6%, to $3.485 per million British thermal units. The contract, which expires at settlement time on Friday, was poised for its highest finish year to date.