Oil Extends Rally as Stockpiles Slide and Risks Remain

By Christopher Alessi Features Dow Jones Newswires

Oil prices surpassed three-year-highs Wednesday morning, boosted by declining U.S. crude stockpiles and ongoing geopolitical risk.

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Brent crude, the global benchmark, was up 0.4% at $69.06 a barrel on London's Intercontinental Exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.7% at $63.37 a barrel.

The American Petroleum Institute, an industry group, released data late Tuesday showing an 11.2 million barrel decrease in crude supplies for the week ended Jan. 5.

The U.S. Energy Information Administration is set to release official inventory data Wednesday afternoon, which should show crude stockpiles declined on average by 2.5 million barrels last week, according to traders and analysts surveyed by The Wall Street Journal.

At the same time, oil market observers are looking this week to see whether President Donald Trump extends U.S. sanctions relief to Iran as part of the 2015 international agreement to curb the Islamic Republic's nuclear program. If the U.S. were to reinstate economic sanctions, it could hinder Iran's oil exports, tightening global supply.

"Overall, the market is focused on the oil-positive news," said Ole Hansen, head of commodity strategy at Saxo Bank. But Mr. Hansen cautioned that the market will "at some point find a wall," suggesting crude prices could soon stagnate.

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In its monthly short-term energy outlook Tuesday, the EIA increased its estimate for world oil demand growth by 100,000 barrels a day, even as it increased its forecast for supply outside the Organization of the Petroleum Exporting Countries by 300,000 barrels a day--mainly the result of U.S. shale production.

The agency now expects U.S. crude production to increase to 10.3 million barrels a day this year, up from a previous estimate of 10 million barrels a day.

However, oil bulls "might have taken heart" because the EIA "does not foresee an increase in global stocks assuming some kind of OPEC discipline," according to Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd.

OPEC and 10 members outside the cartel, including Russia, agreed late last year to extend an accord to cut global crude production by nearly 2% through the end of this year. The agreement was first reached in late 2016 in an effort to rein in a global supply glut and boost prices.

The price of Brent has risen roughly 30% over the past year on the back of the OPEC-led productions curbs and increased geopolitical risk to supply, largely emanating from the Middle East.

Among refined products, Nymex reformulated gasoline blendstock--the benchmark gasoline contract--was up 0.60%, at $1.84 a gallon. ICE gasoil, a benchmark for diesel fuel, changed hands at $612.25 a metric ton, up 0.95% from the previous settlement.

Write to Christopher Alessi at christopher.alessi@wsj.com

Oil prices continued to rise Wednesday morning, boosted by declining U.S. crude stockpiles and ongoing geopolitical risk.

U.S. crude futures rose 29 cents, or 0.46%, to $63.25 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, rose 5 cents, or 0.07%, to $68.87 a barrel on ICE Futures Europe.

Prices have been rallying to three-year highs as potential global supply disruptions and rosy demand projections buoy the market.

Prices initially fell after the U.S. Energy Information Administration reported that U.S. crude stockpiles fell by 4.9 million barrels last week. That is the eighth consecutive weekly decline, but it fell short of the 11.2 million barrel decrease reported Tuesday by the American Petroleum Institute, an industry group.

In addition, gasoline and diesel stockpiles grew by 4.1 million barrels and 4.3 million barrels, respectively.

Still, prices largely held on to recent gains, as inventories dropped at the main storage hub in Oklahoma and U.S. producers slowed down, cutting output by 290,000 barrels a day last week. Total stockpiles of commercial crude and petroleum fell 5.5 million barrels, dropping to the lowest level since June 2015.

"This market does seem to be pretty well supported," said John Saucer, vice president of research and analysis at Mobius Risk Group.

At the same time, oil market observers are looking this week to see whether President Donald Trump extends U.S. sanctions relief to Iran as part of the 2015 international agreement to curb the Islamic Republic's nuclear program. If the U.S. were to reinstate economic sanctions, it could hinder Iran's oil exports, tightening global supply.

"The fundamental factor right now is declining oil inventory and rising geopolitical risk with Iranian sanctions taking oil off the market specifically," said Rob Thummel, portfolio manager at Tortoise Capital Advisors. "That is the biggest thing right now the market is dealing with."

But some said the recent rally may be vulnerable to a correction.

"Overall, the market is focused on the oil-positive news," said Ole Hansen, head of commodity strategy at Saxo Bank. But Mr. Hansen cautioned that the market will "at some point find a wall," suggesting crude prices could soon stagnate.

In its monthly short-term energy outlook Tuesday, the EIA increased its estimate for world oil demand growth by 100,000 barrels a day while it boosted its forecast for supply outside the Organization of the Petroleum Exporting Countries by 300,000 barrels a day -- mainly the result of U.S. shale production.

The agency now expects U.S. crude production to increase to 10.3 million barrels a day this year, up from a previous estimate of 10 million barrels a day.

Oil bulls, however, "might have taken heart" because the EIA "does not foresee an increase in global stocks assuming some kind of OPEC discipline," according to Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd.

OPEC and 10 members outside the cartel, including Russia, agreed late last year to extend an accord to cut global crude production by nearly 2% through the end of this year. The agreement was first reached in late 2016 in an effort to rein in a global supply glut and boost prices.

Gasoline futures fell 1.36 cents, or 0.74%, to $1.8226 a gallon. Diesel futures rose 0.18% to $2.0699 a gallon.

Write to Alison Sider at alison.sider@wsj.com and Christopher Alessi at christopher.alessi@wsj.com

(END) Dow Jones Newswires

January 10, 2018 12:58 ET (17:58 GMT)