Oil Prices Gain Further; Production Cut News Boost Trading Interest

Crude oil futures were up in Asia trade on Tuesday, with prices headed closer to overnight U.S. session highs, as expectations that the Organization of the Petroleum Exporting Countries will extend production cuts until early next year continued to boost trading sentiment.

The news, announced during a joint press conference by Saudi Arabia and Russia on Monday, lifted prices by as much as 4% in the U.S., though trading settled with a 2.1% gain, a three-week high. A formal decision that must be agreed by all the deal participants is expected to be announced next Friday.

"An extension of OPEC and Russia's oil production cuts for another nine months should put a floor under the oil price in the mid-$40 range as the market inches gradually towards balance," said Ric Spooner, chief market analyst at CMC Markets.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in June traded at $49.05 a barrel at 0242 GMT, up $0.20 in the Globex electronic session. July Brent crude on London's ICE Futures exchange rose $0.18 to $52.00 a barrel.

The common view among analysts is that OPEC has little choice but to cut more production in order to bring global inventories down and lift prices. In 2016, when U.S. oil prices averaged around $45 a barrel, the cartel's revenue fell 15% to $433 billion, the lowest level since 2004, according to the U.S. Energy Information Administration.

Nearly five months into the cuts, OPEC data shows the cartel's most recent production has fallen but crude stockpiles in most industrialized nations are almost 300 million barrels above the five-year average.

Extending the curtailment period also comes with several risks. First, it increases the chance of cheating by OPEC members over time and creates "the perception of reduced flexibility" for OPEC, said J.P. Morgan in a report. Meanwhile, the removal of price uncertainty could drive more low-cost producers to boost investments, the bank said.

Instead, OPEC should rather deepen the cuts, instead of stretching out the duration of the cuts, analysts say.

"Such a strategy should support spot pricing but reduce the prospect of prolonged tightness," J.P. Morgan suggested, saying the tactic offers higher risk, yet higher rewards.

The proposed extension to production cuts also comes amid signs that the U.S. crude inventory build up is slowing. A survey by S&P Global Platts showed U.S. domestic crude stocks falling 2.2 million barrels a day last week, thanks to higher refinery utilization. Gasoline and distillates inventories also fell. Readings from the U.S. EIA will be published later Wednesday.

Nymex reformulated gasoline blendstock -- the benchmark gasoline contract -- rose 0.2% to $1.60 a gallon. ICE gasoil changed hands at $456.50 a metric ton, down 0.5% from the previous settlement.

Write to Jenny W. Hsu at jenny.hsu@wsj.com

Corrections & Amplifications

Story corrected at 11:53 p.m. Original misstated that the EIA will publish readings on Tuesday in the tenth paragraph.

(END) Dow Jones Newswires

May 15, 2017 23:46 ET (03:46 GMT)