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U.S. oil futures finished higher on Friday to score a weekly gain as the market marked the official start date for production cuts under the recent agreement between major oil producers.
“Oil prices are defying current oversupply and instead are focused on the start of the most significant oil production cut in history,” said Phil Flynn, senior market analyst at The Price Futures Group.
He said the reductions are poised to be the “most significant oil and product production retrenchment, but the market is also “respecting the current massive oversupply,” which has served to limit market gains.
The Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, were due to start cutting production after agreeing in April to reduce output by 9.7 million barrels a day in May and June. The move was meant to offset a severe drop in global demand on the back of travel restrictions tied to preventing the spread of COVID-19 pandemic.
West Texas Intermediate crude for June delivery CL.1, +4.88% on the New York Mercantile Exchange rose 94 cents, or 5%, to settle at $19.78 a barrel. It logged a 16.8% weekly rise on the New York Mercantile Exchange, according to Dow Jones Market Data. WTI had bounced 52% higher in the last two sessions but still suffered an 8% decline in April and is down almost 68% year to date.
Global benchmark July Brent crude BRNN20, +0.45% settled at $26.44 a barrel on ICE Futures Europe, down 4 cents, or nearly 0.2%. For the week, front-month contract prices rose 6.6%.
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Even as the OPEC+ cuts begin, however, traders eyed the latest figures on April OPEC member production.
OPEC output rose to a 13-month high in April as members pumped 30.25 million barrels per day, according to a survey from Reuters. That was up 1.61 million barrels per day from a revised March figure.
Before the output-cut pact between OPEC+ was reached in April, a meeting in early March had broken down after OPEC member Saudi Arabia and non-member Russia failed to agree on production cuts. That led to a price war and production increases among the two nations.
The U.S. oil benchmark made headlines on April 20 when the May WTI crude contract traded and settled in negative territory for the first time ever. While that was in large part due to the skewed mechanics of the expiration process amid a storage crisis, it was seen as emblematic of a bear market that has seen oil prices suffer a historic plunge.
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An early unwinding of a large chunk of June positions by exchange-traded products in an effort to avoid a rerun of the May debacle may have made room for crude to bounce this week, said Craig Erlam, senior market analyst at Oanda.
Analysts said the supply overhang is likely to keep a lid on crude prices in coming weeks and months, though some see scope for a recovery later in the year as producers slash output and reduce investment in response to the collapse in prices.
“We expect that these low prices will eventually rebalance the market through stronger demand growth as the COVID-19 recession recedes and rapidly falling U.S. shale production,” said Jason Gammel, analyst at Jefferies, in a note.
“The plummet in prices has already forced many large [exploration and production] companies to slash their capital budgets (and dividends) and we expect the same across the industry,” he said. “Ironically, this swift and severe price downturn could lay the groundwork for a significantly undersupplied market beyond 2021, albeit one with bloated inventories.”
As OPEC+ output reductions begin, “early reports suggest that compliance to cuts will be high,” said Price Futures Group’s Flynn.
He said the U.S., which is not part of the OPEC+ alliance, “will see production drop by over 2.0 million barrels a day over time.” ConocoPhillips COP, -6.96% is among the major oil firms that recently announced a voluntary reduction of crude output in June.
The number of active U.S. rigs drilling for oil has fallen for a seventh week in a row, according to the latest data from Baker Hughes. On Friday, data revealed that the number of active U.S. rigs drilling for oil dropped by 53 to 325 this week. That implies further declines in domestic production.
“If you can survive the June [WTI crude delivery] and the global economies continue to open up, we should be near the bottom” for oil, said Flynn.
Back on Nymex, petroleum product prices ended lower, with June gasoline RBM20, -2.00% down 2.2% at 76.63 cents a gallon, with front-month contract prices up 9.5% for the week. June heating oil HOM20, -3.56% fell 4.4% at 79.61 cents a gallon, building a weekly gain of 8.6%.
June natural gas NGM20, -3.28% settled at $1.89 per million British thermal units, down 3% for the session and losing 0.3% for the week.
