Oil extends gain from three-month high on falling U.S. output

By MARK SHENK and RAKTEEM KATAKEY on 3/18/2016

NEW YORK (Bloomberg) -- Crude extended gains from a three-month high as U.S. oil production dropped, while central-bank policies put pressure on the dollar and improved the outlook for demand growth.

Futures rose as much as 2.5% in New York. U.S. crude output fell to the lowest since November 2014, according to an Energy Information Administration report on Wednesday. Baker Hughes Inc. data Friday may show that the number of oil rigs in the U.S. fell from the lowest since 2009. The Bloomberg Dollar Spot Index held near the lowest level since June, after the Federal Reserve scaled back expectations for the pace of interest-rate gains.

"The dollar has stopped falling for the moment but there’s a lot of momentum in the oil market," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "The rig number today could go a long way to perpetuating the production story. If the number drops again domestic production could be just a couple weeks away from falling below 9 MMbbl for the first time since 2014."

Oil is heading for a fifth weekly gain, the longest run since May, amid speculation stronger demand and shrinking U.S. shale oil production will ease a global glut. The Federal Reserve signaled a slower pace of rate increases and Norway and Indonesia cut borrowing costs on Thursday, a week after the European Central Bank boosted stimulus. A weaker dollar typically bolsters the appeal to investors of commodities priced in the U.S. currency.

Production Decline

West Texas Intermediate for April delivery, which expires Monday, rose 41 cents, or 1%, to $40.61/bbl at 10:50 a.m. on the New York Mercantile Exchange. It climbed to $40.20 on Thursday, the highest settlement since Dec. 3. Total volume traded was 18% above the 100-day average. Prices are up 5.5% this week. The more-active May future advanced 32 cents to $41.98.

Brent for May settlement increased 53 cents, or 1.3%, to $42.07/bbl on the London-based ICE Futures Europe exchange. The contract climbed 3% to $41.54 Thursday, the highest close since Dec. 4. The global benchmark crude was at a 9-cent premium to May WTI.

U.S. production dropped by 10,000 bopd to 9.07 MMbopd last week, according to the EIA report. Stockpiles at Cushing, Oklahoma, the delivery point for WTI, increased by 545,000 bbl to a record, while nationwide supplies remain at the highest level in more than eight decades.

Producer Meeting

Saudi Arabia will join a meeting of producers from within and outside the Organization of Petroleum Exporting Countries next month, adding weight to the campaign by financially stricken crude exporters to freeze output and cut the global glut. Qatar’s oil minister said that countries would meet in the nation’s capital of Doha on April 17, without providing details of who would attend.

"We’re rising more on hope than on any real change," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "The oil market is getting ahead of what the fundamentals justify."

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