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Oil prices rally back on Wednesday to nearly 4-year highs despite biggest weekly U.S. crude supply rise of the year

By Mayra P. Saefong

Petroleumworld 10 04 2018

Oil futures rallied on Wednesday as reported declines in Iranian exports due to pending U.S. oil sanctions and uncertainty surrounding the ability of other major oil producers to make up for the loss, lifted U.S. and global prices back to nearly four-year highs.

The strong gains came despite data from the U.S. government which revealed the largest weekly rise of the year in U.S. crude inventories.

“The market is having problems reconciling the supply risk from Iran and questions about how much Saudis will pump and a bearish report,” James Williams, energy economist at WTRG Economics, told MarketWatch.

“It's like the traders are on two sides of the conference table, with one group saying look at the bearish report and the other saying it was just one week's numbers, and the Iran and Saudi uncertainty remains,” he said. “If the Saudis spike production up then a lot of spare capacity disappears and low spare capacity means greater risk.”

“You need an image of Doctor Dolittle's pushmi-pullyu ,” he added, referring to a fictional animal from the 1960s movie—a llama with two heads on opposite sides of its body.

‘It's like the traders are on two sides of the conference table, with one group saying look at the bearish report and the other saying it was just one week's numbers, and the Iran and Saudi uncertainty remains.' James Williams, WTRG Economics

November West Texas Intermediate crude CLX8, -0.25% the U.S. benchmark contract, added $1.18, or 1.6%, to settle at $76.41 a barrel on the New York Mercantile Exchange, but had dropped near the day's low of $74.30 immediately after the supply data.

December Brent LCOZ8, +1.53% rose $1.49, or 1.8%, to $86.29 a barrel on the ICE Futures Europe exchange after tapping lows near $84.

Both benchmark contracts marked their highest settlements since late 2014.

The Energy Information Administration reported Wednesday that domestic crude supplies surged by 8 million barrels for the week ended Sept. 28—the largest weekly climb year to date.

“The 8 million-barrel build in crude was due to a 917,000 [barrel per day] drop in exports, aided by a 163,000 b/d increase in imports,” said Williams.

The previous week's increase of 1.9 million barrels in crude stocks had followed five consecutive weeks of declines. Analysts surveyed by S&P Global Platts had forecast a rise of 2.76 million barrels, while the American Petroleum Institute on Tuesday reported a climb of 907,000 barrels in crude stockpiles.

Gasoline stockpiles fell by 500,000 barrels last week, while distillate stockpiles declined by 1.8 million barrels, according to the EIA. The S&P Global Platts survey had shown expectations for supply declines of 672,000 barrels in gasoline and 1.83 million barrels in distillates.

Prices for petroleum futures climbed along with oil Wednesday. November gasoline RBX8, -0.36% rose 0.5% to $2.138 a gallon and November heating oil HOX8, -0.23% settled at $2.437 a gallon, up 1.2%.

“The only thing keeping crude from a large move down is the upcoming Iran sanctions, which are going to be implemented in November,” said Tariq Zahir, managing member at Tyche Capital Advisors.

The Trump administration's decision to pull out of a 2015 international agreement to curb Iran's nuclear program, and a reimposition of economic sanctions on the third-largest producer of crude—set to kick in next month—has helped to drive oil prices higher because the Organization of the Petroleum Exporting Countries isn't expected to be able to match the country's lost output.

In a further escalation of relations with Iran, U.S. Secretary of State Mike Pompeo announced Wednesday that the U.S. is terminating the 1955 Treaty of Amity, after a United Nations court said the treaty prevented the U.S. from imposing sanctions that affect humanitarian aid.

Elsewhere in energy trading, natural-gas prices tallied a third straight session climb—again settling at their highest since January.

“Hot temperatures leading to higher-than-normal air conditioning use for this time of year is helping drive this week's rally,” said Tyler Richey, co-editor of the Sevens Report. “This breakout has been a long time in the making as inventories remain notably below their five-year and one-year averages.”

November natural gas NGX18, +0.34%  added 2% to $3.23 per million British thermal units.


Story by Mayra P. Saefong from MarketWatch.
10 03 2018 19:19GMT

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