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Futures Movers: Oil rallies as U.S. government reports the first weekly domestic crude supply decline in six weeks

Oil futures rally Wednesday, buoyed by industry data showing a large drop in U.S. crude oil inventories as traders await a meeting of OPEC producers and their allies as expectations grow for an agreement to extend and deepen output cuts. Read More...

Oil futures rallied on Wednesday, after U.S. government data showed the first decline in U.S. crude-oil inventories in six weeks.

Traders also awaited a key meeting of OPEC members set for Thursday and a separate gathering of members and their allies, a group collectively known as OPEC+, scheduled for Friday.

Ahead of those meetings, expectations that the producers will announce a decision to extend and deepen output cuts has grown, but there’s also been talk that the Saudis have threatened to boost their own production because other members have failed to fully comply with current output reductions.

Read: Saudi Arabia threatens to boost its oil output, even as it calls for deeper OPEC+ production cuts

West Texas Intermediate crude for January delivery CLF20, +4.08%  on the New York Mercantile Exchange rose $2.36, or 4.2%, to $58.46 a barrel on the New York Mercantile Exchange. Prices for the front-month contract were headed for the highest settlement since Nov. 21, according to FactSet data. February Brent crude BRNG20, +3.95%  was up $2.47, or 4.1%, at $63.29 a barrel on ICE Futures Europe.

The Energy Information Administration on Wednesday reported that U.S. crude supplies fell by 4.9 million barrels for the week ended Nov. 29. That followed increases in each of the past five weeks. Analysts polled by S&P Global Platts forecast a fall of 700,000 barrels. The American Petroleum Institute on Tuesday reported a 3.7 million-barrel decline.

“A jump in refining activity and ongoing subdued net imports have helped yield the first draw to oil inventories in six weeks,” said Matt Smith, director of commodity research at ClipperData.

“Nonetheless, there are bearish elements to find in the report—both gasoline and distillates have registered inventory builds, despite refinery runs still lagging year-ago levels by nearly 700,000 [barrels per day],” he told MarketWatch.

The EIA data showed supply increases of 3.4 million barrels for gasoline and 3.1 million barrels for distillates. The S&P Global Platts survey showed expectations for a supply climb of 2.7 million barrels for gasoline, while distillates were forecast to increase by 460,000 barrels.

On Nymex, January gasoline RBF20, +3.05% rose 3.1% to $1.6111 a gallon, while January heating oil HOF20, +2.66% was up 2.8% at $1.9322 a gallon.

January natural gas NGF20, -2.29%  fell 2.5% to $2.379 per million British thermal units, ahead of Thursday’s EIA report, which is expected to reveal a weekly decline of 21 billion cubic feet, according to analysts polled by S&P Global Platts.

Meanwhile, speculation has grown that OPEC+ will add to an existing agreement to curb output by 1.2 million barrels a day. That agreement is due to expire at the end of March.

“The OPEC and OPEC+ meetings on Thursday and Friday are about everything except maintaining things as is,” said independent energy expert Anas Alhajji, who’s also managing partner at Energy Outlook Advisors LLC.

“The case for a production cut is overwhelming,” he told MarketWatch, adding that the group may achieve that “through a rollover with strict compliance or through additional cut.”

On Wednesday, however, news emerged that Saudi Arabia had threatened to boost its own oil production if some OPEC nations continue to fail to meet the group’s output curb commitments.

A Saudi delegate said his government was growing tired of indirectly benefitting budgets for countries that are not fully complying with the current output cuts, according to a report from The Wall Street Journal, citing a person who was present at a technical meeting Tuesday.

The delegate said that if noncompliance continues, Saudi Arabia would start to comply with its quota commitment, instead of overcutting it to make up for those who aren’t complying with the cuts.

An S&P Global Platts survey of OPEC production released in early November showed that Saudi Arabia remained well below its quota by some 510,000 barrels per day in October. If the Saudis moved toward strict adherence, that could lead to an increase in OPEC member production.

Oil posted a mixed performance Tuesday, with Brent crude, the global benchmark, seeing its lowest close in almost five weeks while WTI, the U.S. benchmark, rose. Some pressure was attributed to uncertainty over U.S.-China trade negotiations after President Donald Trump said there was no timetable for a deal and that it might be best to wait until after the 2020 election.

Those remarks contributed to a selloff in equities and other assets, including oil, perceived as risky as investors jumped into traditional haven assets. Stocks on Wednesday, however, found support after a Bloomberg report said Beijing and Washington were on track to complete a phase one agreement before a Dec. 15 deadline that would see the U.S. impose another round of tariffs on imports of Chinese goods.

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