Oil Prices Chase $60 After a Year of Surging Demand--3rd Update

By Stephanie Yang and Alison Sider Features Dow Jones Newswires

Oil prices are approaching $60 and major energy companies are signaling fresh optimism that they can hold the recent gains, a dramatic reversal from a few months ago when prices were languishing.

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West Texas Intermediate prices have surged more than 36% from a June low to a two-year high. The $60-a-barrel milestone would mark a shift in sentiment from earlier this year, when prices were in a bear market despite efforts by global producers to limit output. The rebound prompted analysts to boost their price forecasts last month for the first time in six months.

U.S. crude prices are still down nearly 46% from their 2014 high, and fell for a second consecutive day Tuesday, slipping by 0.2% to $57.99 a barrel.

In another sign prices are expected to stabilize, major oil companies are looking to reward shareholders after years of belt tightening.

Royal Dutch Shell PLC said Tuesday it would begin paying its dividend only in cash, scrapping a program that gave shareholders the option of receiving dividends in discounted stock, known as a scrip. Shell also said it is committed to launching a $25 billion share-buyback program soon. Shell shares rose 3.7% in London Tuesday.

Last month, Norway's Statoil ASA said it also intended to do away with its scrip dividend program. BP PLC said last month it is restarting a share-buyback program, and its board has discussed removing its own scrip program.

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Unlike previous years, when oil often dragged down other financial markets, resurgent global economic growth is pushing U.S. stock markets to record highs and lifting oil prices.

"The broader global economic picture has been one that continues to strengthen," said Michael Cohen, head of energy commodities research at Barclays. "There are only a very small number of countries that are not showing positive global growth."

Nearly half of the 35 major equity indexes representing the world's biggest stock markets by value have reached multiyear highs this year. Also, strong factory activity in China has boosted copper -- a widely watched barometer of global economic health -- to near a three-year high.

Profits at many of the world's largest energy companies soared during the third quarter, and the higher prices have given many U.S. companies confidence that they can continue to increase earnings. The energy sector of the S&P 500 hit a 2017 low in August, and has since climbed 9.8%.

Traders say a break above $60 isn't guaranteed. Uncertainty about whether the Organization of the Petroleum Exporting Countries will agree to continue holding crude off the market when the group meets Thursday has weighed on prices recently.

But the International Energy Agency expects oil demand to have increased by 1.5 million barrels a day this year and to rise by 1.3 million barrels a day in 2018.

Some analysts are even more optimistic. Goldman Sachs Group Inc. said in a research note earlier this month that rising consumption, especially in India and China, prompted the bank to boost its forecast for global oil demand -- Goldman analysts now expect it will increase by 1.7 million barrels a day this year from 2016.

"We are more optimistic on oil demand growth given the ongoing solid global growth momentum and the still relatively low oil prices," they wrote in a note Monday, reiterating their forecast.

Demand was a question mark heading into this year. Low prices in 2015 and 2016 fueled "scorching" increases in consumption and some weren't sure whether that would continue, said Doug Terreson, head of energy research at Evercore ISI.

"But with oil prices low and the global economy strengthening, we had another great demand year," he said.

Increased demand has pulled stockpiles of crude oil out of storage this year, even as U.S. shale producers have ramped up output and pushed weekly production to record highs. Last month, crude stockpiles fell to the lowest level since the beginning of 2016, according to the U.S. Energy Information Administration.

"So far it has been surprising to many players in the marketplace how quickly inventories in the United States have adjusted," said Bart Melek, head of commodity strategy at TD Securities.

Global stockpiles have also steadily declined this year, according to data tracked by the IEA. In recent months, increased geopolitical tensions in countries such as Saudi Arabia and Iraq sent oil prices higher, which analysts noted as a sign of a tighter market supply.

Still, the specter of higher U.S. production continues to worry some investors. Jack Ablin, chief investment officer at BMO Private Bank, said restraint by OPEC -- especially Saudi Arabia -- underpinned oil's turnaround this year. But $60 a barrel is likely the upper bound for U.S. crude prices, he said.

"At $60 we would start to see the rig count really ramp up," Mr. Ablin said. "I have a feeling that what Saudi Arabia wants more than high prices would be stable prices."

Oil's recent rally may also be threatened by a meeting this week between OPEC and other global producers including Russia. On Thursday, the group is expected to decide whether or not to extend a deal struck last year to curb production, as part of their efforts to reduce an overhang in crude supply and bring stockpiles back to the average level of the past five years.

While most traders are anticipating an extension to the deal, which is set to expire in March 2018, many said the market is vulnerable to a reversal if the announcement disappoints investors.

Net long positions held by speculative investors recently reached an all-time high in the global Brent market, according to data from Intercontinental Exchange. Net bullish bets on U.S. oil futures also hovered near record highs ahead of the Thursday meeting.

While investors have become more optimistic about the possibility of supply cuts, global demand was the surprise factor that pushed oil prices higher than expected, said Darwei Kung, portfolio manager of the $2.7 billion Deutsche Enhanced Commodity Strategy Fund.

"It's outside of the boundaries that we had anticipated earlier this year," said Mr. Kung, whose firm raised U.S. oil forecasts last week to $58 a barrel over the next 12 months. "Demand was stronger than we expected."

--Michael Amon contributed to this article.

Write to Stephanie Yang at stephanie.yang@wsj.com and Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

November 28, 2017 19:12 ET (00:12 GMT)