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Oil Prices Gain on Supply Expectations

Production levels remain elevated despite plummeting crude prices

By NICOLE FRIEDMAN

Updated Feb. 29, 2016 10:10 a.m. ET

NEW YORK—Oil prices rose Monday on news of lower Nigerian supply and a continued decline in U.S. drilling activity.

Despite plummeting oil prices in the past year and a half, global production has increased as production in the U.S. remained high and the Organization of the Petroleum Exporting Countries has opted not to cut output. The global crude-oil market is expected to remain oversupplied through the rest of the year.

Shell said Friday that it declared force majeure in a pipeline in Nigeria due to a leak. Force majeure refers to a clause often included in commodity contracts that offer companies leeway when extraordinary circumstances—such as fires, natural disasters or war—hinder their ability to fulfill obligations.

Oil exports from the pipeline are expected to be halted until April, Reuters reported, cutting Nigerian output by nearly 250,000 barrels a day. Nigeria produces about 1.8 million barrels a day, according to the International Energy Agency.

Light, sweet crude for April delivery recently rose 70 cents, or 2.1%, to $33.48 a barrel on the New York Mercantile Exchange.

Brent, the global benchmark, rose 82 cents, or 2.3%, to $35.92 a barrel on ICE Futures Europe. The April Brent contract is due to expire at settlement Monday. Brent for May delivery, the more actively traded contract, recently rose 92 cents, or 2.6%, to $36.36 a barrel.

A decline in U.S. drilling activity also boosted prices. The number of rigs drilling for oil in the U.S. fell by 13 last week to 400, the lowest level since 2009.


Oil pipelines at a facility on Khark Island, Iran. Most market participants doubt the effectiveness of a deal on an output freeze without Iran’s participation.

U.S. producers have sharply cut spending new drilling in response to low prices. But they have also cut costs and improved efficiency, so U.S. output hasn’t fallen as quickly as some market watchers had expected.

Some analysts say that at the current drilling level, production will start declining at a faster pace this year.

The oil market is stuck in a tight trading range, said Mike Nielson, a senior derivatives trader at the Copenhagen-based Global Risk Management. “At $36 we are selling and at $32 we are buying, and until this level is broken, we won’t make a decision,” he said.

Talk among large producing nations about a possible production freeze has also boosted prices in recent weeks. Saudi Arabia, Russia, Qatar and Venezuela announced that they are willing to freeze production at January levels. But market participants are skeptical that the deal would be effective without Iran’s participation. Iran is expected to increase its production this year now that international sanctions have been lifted.

Gasoline futures recently rose 0.9% to $1.0258 a gallon. Diesel futures rose 2.3% to $1.0757 a gallon.

—Miriam Malek contributed to this article.

Write to Nicole Friedman at [e-mail]

?http://www.wsj.com/articles/global-oil-prices-mainly-flat-1456747867




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