Oil Holds Most of Gains After Saudi Crackdown

Oil prices edged lower Tuesday, following steep gains Monday that took crude to two-year highs on the back of escalating political tensions in the Middle East.

Brent, the global benchmark, was down 0.17% at $64.16 a barrel on London's Intercontinental Exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 0.05% at $57.30 a barrel.

"I would expect to see some consolidation and profit-taking" in the wake of the latest crude price rally, said Geordie Wilkes, a research analyst at brokerage Sucden Financial Ltd.

But Mr. Wilkes added that the market is "pretty bullish at the moment and a breach of $65 a barrel is likely to cement the bullish sentiment."

Oil prices, which have climbed more than 30% from lows hit in June, jumped 3.5% Monday to heights not seen since 2015 after Saudi Arabian Crown Prince Mohammed bin Salman had more than five dozen princes, ministers and prominent businessmen detained in an effort to tackle alleged corruption in the Kingdom.

The weekend crackdown comes less than five months after King Salman installed his son Prince Mohammed as crown prince and heir apparent. Since then, the crown prince has moved to consolidate his power, while overhauling the Kingdom's oil-dependent economy.

"Although oil production has not been and is not expected to be affected, this is a country with an output of 10 million barrels a day" of crude, said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. "Political uncertainty, therefore, logically leads to market players shying away from the sell button on their keyboard and forces them to cover short positions," Mr. Varga argued.

Prices were also supported after Yemen's Houthi rebels fired a ballistic missile Saturday at the Saudi capital of Riyadh. The Saudis shot down the missile before it reached the city.

Saudi Arabia views the Houthis as proxies of Iran and has led a military coalition against the rebels in Yemen for more than two years.

"The risk for further escalation should not be underestimated," according to analysts at consultancy JBC Energy. "In this context, it makes a lot of sense to see the market pricing in a decent risk premium, " they wrote in a note Tuesday.

Analysts have said the reemergence of a geopolitical risk premium in global oil markets is evidence of the market rebalancing under way.

That sentiment has also been strengthened by a growing consensus that the Organization of the Petroleum Exporting Countries along with some external producers including Russia will move to extend their output cut agreement through the end of next year.

OPEC and some major producers outside the cartel, including Russia, first agreed late last year to cap their production at around 1.8 million barrels a day lower than peak October 2016 levels, with the aim of alleviating global oversupply and boosting prices.

The cartel is set to address lengthening production cuts when it convenes in Vienna at the end of the month.

Among refined products, Nymex reformulated gasoline blendstock--the benchmark gasoline contract--was up 2.04%, at $1.83 a gallon. ICE gasoil, a benchmark for diesel fuel, changed hands at $568.00 a metric ton, up 0.84% from the previous settlement.

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

Oil prices edged lower on Tuesday, as some of the geopolitical fears that took crude to a two-year high faded.

Light, sweet crude for December delivery fell 15 cents, or 0.3%, to $57.20 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, lost 58 cents, or 0.9%, to $63.69 a barrel.

On Monday, oil prices jumped to heights not seen since 2015 after Saudi Arabian Crown Prince Mohammed bin Salman had more than five dozen princes, ministers and prominent businessmen detained in an effort to tackle alleged corruption in the kingdom.

Prices were also supported after Yemen's Houthi rebels fired a ballistic missile Saturday at the Saudi capital of Riyadh. The Saudis shot down the missile before it reached the city.

Following the rally, analysts cautioned that the surge in oil prices may be overdone.

"We've covered a lot of ground very quickly," said John Saucer, vice president of research and analysis at Mobius Risk Group. Oil "looks like it may have gotten a little bit ahead of itself."

Others believe that the geopolitical premium priced into the market will be short-lived, and won't have any discernible impact on Saudi Arabia's oil policy.

"As concerns about geopolitical tensions fade oil prices are likely to give back most of their recent gains," said Thomas Pugh, commodities economist at Capital Economics.

The Organization of the Petroleum Exporting Countries will hold its official meeting in Vienna on Nov. 30, at which some industry watchers speculate the group will extend a deal to limit production beyond March 2018.

OPEC and some major producers outside the cartel, including Russia, first agreed late last year to cap their production around 1.8 million barrels a day lower than peak October 2016 levels, with the aim of alleviating global oversupply and boosting prices.

Analysts have said the reemergence of a geopolitical risk premium in global oil markets is evidence that the market is rebalancing after a yearslong global glut.

Traders will also be watching for inventory data from the U.S. Energy Information Administration, due Wednesday at 10:30 a.m. ET, to see whether the amount of crude in storage has continued to decline.

Traders and analysts surveyed by The Wall Street Journal on average expect crude inventories to have fallen by 2.1 million barrels in the week ended Nov. 3.

The American Petroleum Institute, an industry group, said late Tuesday that its own data for the week showed a 1.6 million-barrel decrease in crude supplies, a 520,000-barrel increase in gasoline stocks and a 3.1 million-barrel decline in distillate inventories, according to a market participant.

Over the last 30 weeks, U.S. crude oil inventories have fallen at the fastest rate on record according to EIA data going back to 1982, Morgan Stanley analysts wrote Monday.

Gasoline futures declined 0.8% to $1.8153 a gallon and diesel futures fell 1% to $1.9219 a gallon.

Write to Stephanie Yang at stephanie.yang@wsj.com and Christopher Alessi at christopher.alessi@wsj.com

(END) Dow Jones Newswires

November 07, 2017 17:05 ET (22:05 GMT)