Oil Prices Pull Back After Supply-Driven Rally

Global oil prices pared gains after jumping to their highest level since 2015 as the shutdown of a key European pipeline sapped more crude from a market where supply has already tightened due to production cuts.

Brent crude, the global benchmark, was up 0.7%, at $65.14 a barrel on London's Intercontinental Exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 0.5%, at $58.27 a barrel.

Late Monday, British refining and chemicals company Ineos said it would shut down the Forties Pipeline System for several weeks after discovering a widening crack. The pipeline system delivers around 40% of U.K.'s North Sea oil and gas production, carrying about 445,000 barrels of crude a day.

"The pipeline outage is the big driver right now," said Tom Pugh, a commodities economist at Capital Economics. "When you take out so much oil out of the market, that inevitably adds to the tightness."

The outage comes as production cuts by the Organization of the Petroleum Exporting Countries and other major producers like Russia takes oil off what has been an oversupplied market. Last month, OPEC and its allies agreed to extend their production cuts by nine months to the end of 2018.

Boosted by this deal, which was first agreed late last year, Brent is up 15% in 2018 while WTI is up 9%.

"Even if you do not believe that the extension of the OPEC/non-OPEC deal will boost the global rebalancing process you would have found it impossible to resist of buying oil futures," said Tamas Varga, analyst at PVM brokerage. The "closure of the Forties pipeline system for weeks is one of the most significant unplanned crude oil shortage we have seen this year," he said.

Ineos said that repairs of the Forties Pipeline System could take several weeks after the worsening of an onshore hairline fracture south of Aberdeen, Scotland. A small amount of oil has seeped from the pipeline, the company said, but the leak has been contained.

The rally in oil prices Tuesday also gave a boost to energy shares, with oil and gas stocks in the Stoxx Europe 600 rising 1%.

With some of the Forties crude underpinning the Brent crude benchmark, the global price was rising faster than WTI benchmark. This boosted the spread between Brent and WTI, trading around $7 a barrel, a welcome development for U.S. exporters to Europe.

The run-up in prices, however, could also prove self-defeating, as expensive crude incentivizes U.S. shale producers to ramp up activity. The U.S. oil rig count--the number of active rigs drilling for oil--has increased for three weeks in a row.

"The Forties outage gives U.S. producers a chance to get on the market and hedge their output," Mr. Pugh said.

Producers typically take advantage of rising oil by using hedges to lock in the higher prices. According to Citigroup, U.S. suppliers sped up hedging activities for their 2018 production in the third quarter. Over the course of the last quarter the hedge ratio for 2018 production jumped from 12% to 27%, the highest level of hedges since 2014, the bank said.

"High levels of hedge cover of 2018 production could bolster the growth outlook for U.S. shale next year," the bank said in a report.

Among refined products, Nymex reformulated gasoline blendstock--the benchmark gasoline contract--was up 1.7%, at $1.76 a gallon. ICE gas oil, a benchmark for diesel fuel, changed hands at $581.75 a metric ton, up 1.6% from the previous settlement

Neanda Salvaterra contributed to this article

Write to Georgi Kantchev at georgi.kantchev@wsj.com

Oil prices declined Tuesday after a rally off the shutdown of a key European pipeline prompted investors to take profits.

Light, sweet crude for January delivery settle down 85 cents, or 1.5%, at $57.14 a barrel on the New York Mercantile Exchange, after fluctuating between gains and losses earlier in the day. Brent, the global benchmark, fell $1.35, or 2.1%, to $63.34 a barrel.

Brent prices rose to the highest level since 2015 early Tuesday, breaking above $65 after British refining and chemicals company Ineos said it would shut down the Forties Pipeline System for several weeks after discovering a widening crack. The pipeline system delivers around 40% of U.K.'s North Sea oil and gas production, carrying about 445,000 barrels of crude a day.

However, the market sold off as the $65-a-barrel milestone prompted some investors to take profits on long positions, and led producers to lock in prices and sell future output.

"You've seen increased producer hedging activity in addition to profit-taking from the managed money crowd," said Tony Headrick, an analyst at CHS Hedging.

Ineos said repairs of the Forties Pipeline System could take several weeks after the worsening of an onshore hairline fracture south of Aberdeen, Scotland. A small amount of oil has seeped from the pipeline, the company said, but the leak has been contained.

"You've got one of the most important pipes on the planet down," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. However, fluctuations in oil prices raised uncertainty about how long the pipeline would be under repair, he said.

Lower prices "would imply to me that the start time on the pipe has been shortened," Mr. Yawger said.

The outage comes as production cuts by the Organization of the Petroleum Exporting Countries and other major producers like Russia take oil off what has been an oversupplied market. Last month, OPEC and its allies agreed to extend their production cuts by nine months to the end of 2018.

"Even if you do not believe that the extension of the OPEC/non-OPEC deal will boost the global rebalancing process, you would have found it impossible to resist buying oil futures," said Tamas Varga, analyst at PVM brokerage. The "closure of the Forties pipeline system for weeks is one of the most significant unplanned crude oil shortage we have seen this year," he said.

The run-up in prices, however, could also prove self-defeating, as expensive crude incentivizes U.S. shale producers to ramp up activity. The U.S. oil rig count -- the number of active rigs drilling for oil -- has increased for three weeks in a row.

"The Forties outage gives U.S. producers a chance to get on the market and hedge their output," Mr. Pugh said.

Producers typically take advantage of rising oil prices by using hedges to lock in the higher levels. According to Citigroup, U.S. suppliers sped up hedging activities for their 2018 production in the third quarter. Over the course of the last quarter the hedge ratio for 2018 production jumped from 12% to 27%, the highest level of hedges since 2014, the bank said.

"High levels of hedge cover of 2018 production could bolster the growth outlook for U.S. shale next year," the bank said in a report.

Traders are also awaiting numbers due Wednesday from the U.S. Energy Information Administration on how much crude oil still sits in storage. Traders and analysts surveyed by The Wall Street Journal expect crude stockpiles to have dropped by 2.9 million barrels on average in the week ended Dec. 8.

The American Petroleum Institute, an industry group, said late Tuesday that its own data for the week showed a 7.4-million-barrel decrease in crude supplies, a 2.3-million-barrel rise in gasoline stocks and a 1.5-million-barrel rise in distillate inventories, according to a market participant.

Gasoline futures fell 1.7% to $1.6976 a gallon and diesel futures rose 0.9% to $1.9336 a gallon.

--Neanda Salvaterra contributed to this article.

Write to Georgi Kantchev at georgi.kantchev@wsj.com and Stephanie Yang at stephanie.yang@wsj.com

(END) Dow Jones Newswires

December 12, 2017 17:22 ET (22:22 GMT)