Why are oil prices rebounding?

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November 21, 2018 12:01pm NYSE:USO

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From Myra Saefong & Rachel Koning Beals: Oil futures gained on Wednesday, buoyed by expectations for a production cut at a meeting of major oil producers early next month, but prices traded off the session’s high following U.S. government data that showed a ninth straight weekly rise in U.S. crude supplies.

Prices found support even as a report said Saudi Arabian oil production surged to a record near 11 million barrels a day this month.

Read: Here’s why falling oil prices are now a net drag on the U.S. economy

In Wednesday trading, January West Texas Intermediate crude CLF9, +4.06%rose 96 cents, or 1.8%, to $54.39 a barrel. It touched an earlier high of $54.85 and was trading at $54.34 right before the supply data. It settled Tuesday at $53.43 on the New York Mercantile Exchange, the lowest front-month contract settlement since Oct. 26, 2017, according to Dow Jones Market Data.

Global benchmark January Brent LCOF9, +2.93% edged up by 34 cents, or 0.5%, to $62.87 a barrel, down from an intraday high of $63.96. Its finish at $62.53 Tuesday was the lowest settlement since February.

Read: Which markets are closed on Thanksgiving?

Both WTI and Brent oil earlier this month lapsed into a bear market, defined as a decline of at least a 20%, after trading at nearly four-year highs in early October.

Read: A death cross is forming in U.S. oil, underlining the unraveling of crude prices

Early Wednesday, the Energy Information Administration reported that domestic crude supplies rose for a ninth straight week–up 4.9 million barrels for the week ended Nov. 16. Analysts surveyed by The Wall Street Journal had forecast a rise of 1.9 million barrels, while the American Petroleum Institute on Tuesdayreported a decline of roughly 1.5 million barrels.

Gasoline stockpiles fell by 1.3 million barrels last week, while distillate stockpiles edged down by 100,000 barrels, according to the EIA. The Wall Street Journal survey had shown expectations for supply declines of 400,000 barrels in gasoline and 2.3 million barrels for distillates.

December gasoline RBZ8, +3.00%  rose 1.1% to $1.513 a gallon, while December heating oil HOZ8, +0.92%  lost 0.5% to $1.98 a gallon.

Among the figures in the EIA report, the “real eye opener was distillates,” which include heating oil, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch. There was a much smaller draw, “which is quite surprising with the cold spell that we are currently [experiencing] in the Midwest and East Coast.”

As for Saudi Arabia, the jump in output was a response to stronger-than-usual demand from clients preparing for a disruption in Iranian supplies, Bloomberg reported, citing industry executives who track Saudi output. The figures were earlier reported by trade publication International Oil Daily.

Riyadh has been pumping about 10.8 million to 10.9 million barrels a day of crude, the Bloomberg report noted.

Read: Trump thanks Saudis for $54 oil, but says in Wednesday tweet, ‘let’s go lower’

U.S. President Donald Trump coming out and saying he would like to see lower oil prices and wants the Saudis to continue to pump oil into the market, really has “Saudi Arabia, in our opinion, boxed in,” said Zahir. “If they try and implement a cut next year, Trump could counter with taking a harder stance on sanctions on Saudi Arabia” in response the murder of journalist Jamal Khashoggi.

That leaves the Saudis in a “tight spot if they do decide to take on the bulk of the cut,” because “it doesn’t look like Russia will be on board and with U.S. production at all-time highs and trending higher, any cut will basically be Saudi Arabia losing market share to U.S. producers,” Zahir said.

A decision by the Trump administration to grant waivers to major buyers of Iranian crude following the enactment of U.S. sanctions on the Islamic Republic had fueled a global sell off in oil. Sanctions had been expected to keep most Iranian oil off the market.

At the same time, leading producers U.S., Russia and Saudi Arabia are pumping crude at record levels, causing global supply to significantly outrun demand, according to a recent report from the International Energy Agency.

OPEC and its allies signaled earlier this month that they could enact a joint production cut. Such a move would come just months after the group decided to ramp up production after more than a year of holding back output. OPEC has reached an initial agreement to cut output at a meeting next month, but it hasn’t yet agreed on the amount, according to Reuters.

Stock-market volatility, including a plunge that flipped major averages negative for the year, has added to concerns for global thirst for oil at the same time that energy markets are trying to sort an oversupply situation. Groups, including OPEC, have cut their oil-demand growth outlook for this year and next.

Meanwhile, the U.S. natural-gas supply report will be released at noon Eastern Time, a day earlier than usual because of Thursday’s Thanksgiving holiday.

December natural gas NGZ18, +0.99% rose 1.4% to $4.585 per million British thermal unit after a weather-influenced rally took prices up nearly 15% last week, hitting their highest in over four years.

The United States Oil Fund LP (USO) was trading at $11.75 per share on Wednesday morning, up $0.48 (+4.26%). Year-to-date, USO has declined -2.16%, versus a 0.40% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of MarketWatch.

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