Oil Shrugs Off U.S. Supply Drop as Investors Await OPEC Meeting

(Bloomberg) -- Oil investors shrugged off declining U.S. stockpiles as they held their breath ahead of OPEC’s meeting on Thursday.

Anticipation is building up as OPEC and its allies came one step closer to agreeing to extend their deal after a committee endorsed another nine months of cuts. Futures closed 0.2 percent lower in New York even after the U.S. Energy Information Administration said inventories shrank for a seventh straight week, by more than twice the amount analysts had forecast.

"This was a fairly bullish report across the board but I think the market is holding its breath ahead of the OPEC meeting tomorrow," Adam Wise, who helps run a $7 billion oil and natural gas bond and private equity portfolio at John Hancock in Boston, said by telephone.

Oil climbed back above $50 a barrel late last week as Saudi Arabia and Russia rallied support for the extension ahead of the official meeting of the Organization of Petroleum Exporting Countries in Vienna. While the curbs have succeeded in denting stockpiles in the U.S., inventories are still near records while American drillers add more rigs and boost production.

West Texas Intermediate for July delivery fell 11 cents to settle at $51.36 a barrel on the New York Mercantile Exchange. Prices touched $51.88 earlier, the highest intraday price since April 19. Total volume traded was about 19 percent above the 100-day average.

Brent for July settlement fell 19 cents to $53.96 a barrel on the London-based ICE Futures Europe exchange. The global benchmark oil closed at a $2.60 premium to WTI.

U.S. crude supplies fell 4.43 million barrels last week -- more than twice the 2 million-barrel decline forecast by analysts surveyed by Bloomberg -- to 516.3 million barrels, the EIA said. That’s still more than 100 million barrels higher than the five-year average for this time of the year, data compiled from the EIA show. Crude production rose 15,000 barrels a day to 9.32 million, the highest since August 2015.

Gasoline supplies slipped 787,000 barrels, while inventories of distillate fuel, a category that includes diesel and heating oil, dropped 485,000 barrels to 146.3 million, the lowest since November 2015.

Anticipated Decision

"We’ve already had a nice rally," Brian Kessens, a managing director and portfolio manager at Tortoise Capital Advisors LLC in Leawood, Kansas, who helps manage $17.1 billion in energy assets, said by telephone. "We’re anticipating a nine-month extension of the supply cuts and prices should get a little bit of a bump if that’s what they agree to tomorrow."

The Joint Ministerial Monitoring Committee -- composed of six OPEC and non-OPEC countries -- agreed in Vienna on Wednesday to support an extension through March 2018, according to a statement on the producer group’s website. That added to the backing for another nine months of cuts from the most influential participants in the deal, including Russia, Saudi Arabia and Iraq.

OPEC and 11 non-members agreed last year to cut output by as much as 1.8 million barrels a day. The supply reductions were initially intended to last six months from January, but the slower-than-expected decline in surplus fuel inventories prompted the group to consider an extension.

The JMMC discussed several scenarios for the cuts before settling on nine months, delegates said. Prior to the meeting, ministers had also mentioned the possibility of an additional six months, 12 months or even curbs extending through the whole of 2018. The committee didn’t discuss deeper cuts and will continue to monitor the market regularly, delegates said. Oil officials from the 24 countries participating in the deal will finalize their agreement Thursday.

The countries "don’t want to be too contentious here," Michael Cohen, head of energy commodities research at Barclays Plc, said from Vienna in an interview on Bloomberg TV. "They want an agreement that’s agreeable to all parties."

Oil-market news:

• U.S. shale drilling pioneer Mark Papa traveled to Vienna last week to deliver a message to OPEC: Don’t worry about us.
• Government work has paid off handsomely for billionaire Carl Icahn.
• Talks on extending oil production curbs with OPEC may hold the key to further monetary easing by Russia’s central bank after April data painted a mixed picture of the world’s biggest energy exporter.

--With assistance from Scarlet Fu and Julia Chatterley

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

To contact the editors responsible for this story: Carlos Caminada at ccaminada1@bloomberg.net, Richard Stubbe