Oil prices erase losses as hopes of freeze deal build

London (Apr 12)  After a wobbly start to the day, oil futures shot higher on Tuesday on hopes that key oil producers could agree on a production freeze this Sunday.

U.S. crude oil CLK6, +0.92% rallied 1.1% to $40.80 a barrel, extending gains from Monday when prices were buoyed by a weaker dollar and higher anticipation that major oil players, such as Russia and Saudi Arabia, would reach a coordinated production freeze to revive prices.

Brent oil LCOM6, +1.33%  jumped 1.5% to $43.45 a barrel. Both contracts had traded with losses early in the session, but started to erase gains at the start of the European trading day.

“Market participants are viewing price falls as a good opportunity to buy. The expectation that oil producers will agree on production caps at their meeting in Doha this Sunday is also bound to be playing its part,” analysts at Commerzbank said in a note.

They also noted that speculative long positions in Brent climbed by 2,500 to a new record level of just shy of 351,000 contracts in the week to 5 April.

“This was the fourth consecutive weekly rise and the seventh in the last eight weeks. However, this also means that considerable correction potential has built up if the outcome of the Doha meeting were to prove disappointing,” the analysts said.

‘A freeze excluding Iran is all about market psychology. It will have little to no impact on real crude production. However, the impact of market psychology could still be quite large.’
Societe Generale analysts 

For nearly two months, oil prices have been volatile as the market tried to gauge the likelihood of a concerted effort by the oil majors to tighten supply. The initial mention of a meeting back in February stoked a buying spree but prices dove when Saudi Arabia, one of the original initiators of the pact, later showed reluctance to participate in the agreement unless Iran pledges to do the same.

However, Tehran has repeatedly showed zero interest in a production freeze at the current level, saying it would keep pumping until productions reaches the pre-sanction level of around 4 million barrels a day.

Goldman Sachs forecasts the Sunday meeting won’t yield any “bullish surprise” and said arresting output at the current level could be “self-defeating” because any moves to push prices up would entice more producers to turn the taps wider, introducing more barrels into the market.

Analysts at Societe Generale estimate a 50% probability that the meeting would result in a general production freeze.

“A freeze excluding Iran is all about market psychology. It will have little to no impact on real crude production. However, the impact of market psychology could still be quite large,” said analysts in a note.

For this week, market watchers will be taking cues from the weekly U.S. crude inventories and production data scheduled for release on Wednesday. In a survey of analysts conducted by pricing agency Platts, U.S. crude stockpiles likely added 1 million barrels in the week ended April 8, driven by stronger imports due to stronger refining margin and sagging U.S. crude output. U.S. gasoline stocks is expected to have contracted by 1.9 million barrels in the same period.

Nymex reformulated gasoline blendstock for May RBK6, +0.20%  — the benchmark gasoline contract — rose 0.2 to $1.51 a gallon, while heating oil for the same month HOK6, +1.54%  jumped 1.7% to $1.24 a gallon.

Source: MarketWatch