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Heating oil futures rally as OPEC and Russia reach a deal to cut production

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December 7th, 2018

Heating oil futures climbed Friday as members of the Organization of the Petroleum Exporting Countries and their allies reached an agreement to curb production starting in January, easing worries about a potential global glut of crude supplies and helping to lift prices up by more than 3% for the week.

OPEC announced Friday that it will reduce overall production among its members by 800,000 barrels a day from October’s levels for six months, beginning in January. The statement, which may have been written on Thursday, the day of the OPEC meeting, didn’t specify the output cut by nonmembers, which include Russia, but news reports have pegged the nonmember cuts at 400,000 barrels a day to bring the total reduction to 1.2 million barrels a day.

Read: U.S., Russia overshadow oil market’s ‘collective sigh of relief’ for OPEC’s output-cut deal

Despite the agreement, “the math, as usual, remains fuzzy,” said Matthew Parry, head of long-term research at Energy Aspects.

“Iran, Venezuela and Libya are exempt from the deal, but due to the usual politics within the group, these will not be called exemptions,” he said. “And because OPEC does not want to grant anyone exemptions and because the three countries in question simply would not sign off without one, OPEC will not be releasing country level breakdowns.”

Still, the “development enlivened the bulls after earlier reports had Saudi Arabia saying it remained skeptical of an agreement among major producers to cut output given Russia’s trepidation,” said Parry.

Against this backdrop, West Texas Intermediate crude for January delivery CLF9, -0.86%  rose $1.12, or 2.2%, to settle at $52.61 a barrel on the New York Mercantile Exchange. The contract saw a roughly 3.3% weekly gain, according to Dow Jones Market Data.

Global benchmark February Brent crude LCOG9, -0.53%  rose $1.61, or 2.7%, to finish at $61.67 a barrel on ICE Futures Europe. It was up 3.7% for the week.

Read: Oil-linked currencies rally as OPEC members reportedly reach agreement to curb production

Matt Badiali, a senior research analyst at Banyan Hill Research specializing in oil and commodities, told MarketWatch on Friday that the oil market hasn’t yet priced in any of production cuts, which begin at the start of the year. Prices on Friday settled below the session’s highs.

“There was a huge glut of oil in November, thanks to the ramp up in production by Russia, the U.S. and Saudi Arabia ahead of the Iran debacle,” he said. The U.S. gave some nations permission to continue buying Iranian oil, just as U.S. sanctions on Tehran’s energy sector began in November.

“When Iran’s oil didn’t get taken off the market, we had a tsunami of oil available,” said Badiali. “That, combined with a gloomy outlook on global growth, pushed the oil prices down. Far down.”

Prices had fallen by more than 30% by late November, after reaching multiyear highs as recently as early October.

“Now we have a situation where supply will come off the market,” Badiali said. “I expect to see oil prices pop 20%+ from their lows in the next week or two.”

Concerns that oil producers wouldn’t reach an agreement to aggressively reduce output had weighed on prices, but U.S. government data revealing the first decline in domestic crude supplies in 11 weeks did offer a brief respite in prices from the session’s lows on Thursday and contributed to Friday’s early move.

On Thursday, the Energy Information Administration said U.S. crude supplies fell by 7.3 million barrels for the week ended Nov. 30. That marked the EIA’s first reported weekly supply decline in 11 weeks.

Data released Friday from Baker Hughes BHGE, -0.81%  also implied a decline in future output, with the number of active U.S. rigs drilling for oil down by 10 at 877 this week.

The recent decline in crude prices also came as jitters pegged to international trade relations between China and the U.S. escalated, and raised concerns about demand for oil. Market tension intensified after the arrest of Huawei Technologies’s chief financial officer, Meng Wanzhou, in Canada at the request of the U.S.

In other Nymex trading Friday, January gasoline RBF9, +0.42%  rose 3.7% to $1.486 a gallon, for a weekly rise of about 6%, and January heating HOF9, -0.82%  settled at $1.886 a gallon, up 1.5% for the session, with a weekly gain of 3.1%.

January natural gas NGF19, +2.76%  rose 3.7% to $4.488 per million British thermal units, but still suffered a weekly drop of 2.7%. The EIA on Friday reported that domestic supplies of natural gas fell by 63 billion cubic feet for the week ended Nov. 30, more than the 57 billion forecast by analysts polled by S&P Global Platts.

 - MarketWatch.

See Also: Crude Oil, Natural Gas, Heating Oil, Unleaded Gas, Ethanol, Gasoline Blendstock