Why oil prices scored their biggest one-day rally of 2017
WTI oil settle 3.3% higher Tuesday
OPEC members can’t take all the credit for oil’s rally Tuesday surge, which saw prices score their biggest single-session gain of the year.
News of cuts to oil-and-gas exploration spending and signs of a potential slowdown in U.S. output also played roles in the bullish shift in sentiment.
On Tuesday, September West Texas Intermediate crude CLU7, +3.24% rallied by $1.55, or 3.3%, to settle at $47.89 a barrel on the New York Mercantile Exchange, marking the strongest single-day climb since late last year, according to FactSet data.
Saudi Arabia said at a meeting in Russia Monday that it would cut August exports to 6.6 million barrels a day—a million barrels less than a year earlier. Separately, Nigeria, which isn’t part of the production-cut agreement led by the Organization of the Petroleum Exporting Countries, also promised to limit its daily production to 1.8 million barrels.
Traders have taken these developments as bullish for prices, though many do point out that the Saudis normally lower exports at this time of year because of stronger domestic demand for oil, and Nigeria’s output would still have to rise from it’s current level of just over 1.6 million barrels a day before the West African nation would cap its output.
“OPEC and Non-OPEC members displayed optimism over the current production cut deal and seemed confident that the path they were treading would eventually rebalance the markets,” said Lukman Otunuga, research analyst at FXTM, in an note Tuesday.
Saudi energy minister Khalid al-Falih said Monday the coalition’s compliance with the production deal was strong, while OPEC secretary-general Mohammad Barkindo said the rebalancing of oil-market supply and demand is “bound to accelerate in the second half,” according to The Wall Street Journal.
Adding further support to oil prices, James Williams, energy economist at WTRG Economics, pointed to “Halliburton’s expectation of a flat rig count” as well as “Anadarko Petroleum Corp.’s losses and plans to reduce exploration.”
After posting a larger-than-expected second-quarter loss, oil-and-gas exploration and production company Anadarko Petroleum Corp. APC, +3.47% cut its investment guidance by $300 million for the full year. Al Walker, the company’s chief executive officer, cited “current market conditions [that] require lower capital intensity given the volatility of margins realized in this operating environment.”
Year to date, oil prices, in particular, have dropped by around 11%, while natural-gas prices NGU17, +1.56% have lost nearly 20%.
Meanwhile, David Lesar, Halliburton Co.’s HAL, +1.52% chief executive officer and president, said in an earnings call that “rig count growth is showing signs of plateauing and customers are tapping the brakes.”
That implies a potential slowdown in oil production, market participants said.
And nearer term, traders are looking ahead to a weekly report that is expected to reveal a fourth-straight weekly decline in U.S. crude inventories. Analysts polled by S&P Global Platts expect the Energy Information Administration to report on Wednesday a decline of 2.5 million barrels for crude stockpiles in the week ended July 21.
“U.S. oil stocks, while still higher than we need, are down 45 million barrels from the end of March,” said Williams.