Oil prices up on production cuts, but investors wary of U.S. political impact

Published: Feb 3, 2017 10:06 a.m. ET

Russian oil production dropped in January

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Oil futures traded mostly higher on Friday, poised for a gain on the week on expectations that the output cuts by major producers would continue to chip away at global oversupply.

But concerns over the potential for a sizable increase in U.S. producers, as well as uncertainty surrounding the impact of President Donald Trump’s policies in the energy market kept oil prices in a tight trading range.

On the New York Mercantile Exchange, March West Texas Intermediate crude CLH7, +0.62%  tacked on 2 cents to $53.56 a barrel, trading between a high of $54.05 and a low of $53.40. For the week, prices were looking at a gain of around 0.7%. April Brent crude LCOJ7, +0.72% the global oil benchmark, fell 5 cents, or 0.1%, to $56.51 a barrel on London’s ICE Futures exchange, with the contract trading about 1.5% higher on the week.

Analysts generally believe that the Organization of the Petroleum Exporting Countries is complying with more than 80% of its targeted production cuts, in place since the start of the year, in an effort to address a global glut in supply.

Data from the Russian Energy Ministry Thursday showed the country’s production of oil and condensate dropped by around 100,000 barrels a day in January from the previous month. The report raised hope that oil-producing nations beyond OPEC are adhering to a deal that calls for a collective reduction in output of 1.8 million barrels a day, or roughly 2% of the world’s daily production.

“There’s very high confidence in the market that OPEC is going to help drive inventories gradually lower through the first half of the year,” said Bjarne Schieldrop, chief commodities analyst at Norwegian bank SEB.

Data on OPEC’s January production will be released mid-February. OPEC is scheduled to meet in June to review the effectiveness of the pact and the cartel could suggest extending the deal for more months.

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A fully implemented deal could swing the oil market to a 900,000-barrel-a-day deficit by the third quarter, said Citi Futures Analyst Tim Evans. “Of course, that assumes the production limits are extended beyond the initial six-month period, which can’t be taken for granted,” he said.

Offsetting positive sentiment are production gains in the U.S., where inventories of crude and gasoline grew much more than anticipated last week. Analysts say the growth trend will likely remain in tandem with rising oil prices. Increased supplies from the U.S. risk undercutting OPEC’s effort to remove oversupply. Moreover, non-U.S. oil nations may be enticed to crank up their operations in defense of their market share.

According to the Energy Information Administration’s latest forecast, U.S. crude-oil production will expand from an average of 8.9 million barrels a day in 2016 to 9.3 million barrels a day in 2018.

Oil players are also watching Trump’s energy policies and his attitude toward Iran. This week, the administration condemned Tehran for conducting a ballistic missile test, fueling speculation that the U.S. may toughen its stance and reinstate sanctions against Iran, including those for oil trading.

“The last two or three years we’ve had so much oil in the market, so geopolitical risks haven’t mattered so much but now that we move into a more balanced market, suddenly these geopolitical risks—with Iran definitely being one of them—are much more important,” said Schieldrop.

Another area of concern is President Trump’s eagerness to revamp the 23-year-old North American Free Trade Agreement.

“The oil markets will be keeping a close eye on Trump as news overnight that he has serious concerns regarding the Nafta could have implications for imports from Canada and Mexico to the U.S.,” said Stuart Ive, a client manager at OM Financial.

Back on Nymex, March gasoline RBH7, +0.44%  edged down by a penny to $1.523 a gallon, trading about 1.8% lower on the week, while March heating oil HOH7, +0.73%  was up less than 0.1% at $1.653 a gallon.

March natural gas NGH17, -3.86%  traded at $3.087 per million British thermal units, up 10 cents, or 3.1%.