Oil Hits Highest Level in More Than a Month Ahead of OPEC Meeting

By Timothy Puko Features Dow Jones Newswires

Oil prices rose to a fresh one-month high Monday, with traders expecting this week's OPEC meeting to end with an extension or even deepening of the group's recent production cuts.

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Gains Monday would be the 10th in 12 sessions, one of several lengthy rallies in recent months largely tied to the Organization of the Petroleum Exporting Countries. Falling stockpiles this month in the U.S. have some convinced that cuts from the group of global exporters are impacting supply, and crude prices are up 12% since they hit a six-month low May 4.

OPEC meets Thursday to discuss its continuing, six-month deal to drop production by 1.8 million barrels, which leaders have said may get an extension through next winter. Comments along those lines from OPEC officials and from Saudi and Russian leaders haven't received as much attention as they may have deserved, analysts at Credit Suisse Group AG said in a note Monday morning.

They are "fully aware that their efforts so far have broadly failed and that either the group abandons active supply management entirely, or it becomes more serious. It looks as if producers will get serious," said the analysts, led by Jan Stuart.

U.S. crude for June delivery recently gained 34 cents, or 0.7%, to $50.66 a barrel on the New York Mercantile Exchange. The June contract expires at settlement, and the more actively traded July contract recently gained 36 cents, or 0.7%, to $51.03 a barrel. Brent, the global benchmark, gained 24 cents, or 0.5%, to $53.85 a barrel on ICE Futures Europe.

Major oil producers will join OPEC members in Vienna to discuss extending their 6-month agreement to cut production by 1.8 million barrels a day set to expire in June. There is near-unanimity among watchers that the deal will be extended, with the only real questions being for how long and whether cuts are more severe.

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"Crude is increasingly pricing in expectations that production cuts will be rolled over into 2018," said consultancy JBC Energy in a note, adding that maintaining the cuts beyond the original six-month period is critical to keeping WTI above $50.

Gordon Kwan, head of regional energy research at Nomura, said deeper production cuts of more than 2 million barrels a day may be on the card as Saudi Arabia is showing signs of impatience with the pace of rebalancing, which is happening slowly as U.S. producers have stepped up output this year.

The investment bank estimates OPEC has been 90%-compliant with the promised cuts so far, but the rebalancing of supply and demand could still be as far as 18 months away, after the buildup of stocks over the past three years.

The risk of a long extension to the cuts is that it could further encourage U.S. shale output, said Capital Economics. But even with higher U.S. supplies, the oil market under OPEC-led production caps would eventually move toward a "significant deficit."

U.S. shale oil producers have been steadily ramping up production with the Energy Information Administration forecasting U.S. output to hit a record of nearly 10 million barrels a day in 2018.

Most of that growth comes from the Permian Basin, but even rapid growth there of about 1 million barrels a day by the end of 2018 leaves a supply gap, analysts at Raymond James Financial Inc. said in a note Monday. It is far below cuts from OPEC at a time when demand is likely to keep growing strong, said Justin Jenkins, analyst at the firm.

"We have one of the most (if not the most) aggressive 2017-18 Permian production growth forecasts...but we don't think it will be sufficient to oversupply the oil market in the near future," he said. "OPEC probably gets there without the cuts, but it accelerates the rebalancing if they keep them going."

Gasoline futures recently gained 0.3% to $1.6571 a gallon and diesel futures rose 1% to $1.5977 a gallon.

Sarah McFarlane and Biman Mukherji contributed to this article

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

May 22, 2017 12:17 ET (16:17 GMT)