By Barani Krishnan
Investing.com – US gasoline futures finished their first week above $2 per gallon since 2019, while global crude benchmark Brent neared $70 a barrel, after producer alliance OPEC+ largely withheld a production hike for next month, defying market expectations.
New York-traded settled at $2.065 per gallon on Friday, finishing its first week above the $1-gallon territory since the $2.047 settlement for the week ended May 10, 2019. For the current week, RBOB gasoline gained 10%, extending to nearly 47% its year-to-date rally.
The average gasoline price at U.S. pumps, meanwhile, hit $2.75 per gallon on Friday from $2.41 a year ago, the American Automobile Association reported.
On the crude front, U.S. benchmark settled at $66.09, up $2.26, or 3.5%, on the day. For the week, WTI rose 7.5% and year-to-date, it was up about 36%. The U.S. crude benchmark also hit a 13-month high of $66.40 during Friday’s session.
London-traded global benchmark settled at $69.36, up $2.62, or 4% on the day. For the week, Brent rose almost 5% while year-to-date, it rose about 34%. It also hit a 13-month high of $69.57 intraday.
“It’s always on the highs that the market looks the most bullish, but keep in mind that oil struggled to keep pace with other commodities because there was perception of supply overhang, (that) higher prices would result in more OPEC supply and also a return of shale,” Scott Shelton, energy futures broker at ICAP (LON:) in Durham, North Carolina, said.
“It turns out that OPEC is sending the message that they are not concerned with their competition any more and are willing to let prices rise as the signals from the industry are that their production will not grow in a significant way.”
The competition that Shelton was referring to was U.S. shale oil drillers, who have let the country’s one-time world high production of oil slip by 30% in just a year. As of March 2020, U.S. crude output was at a peak of 13.1 million barrels per day. It is now at 10 million bpd, after the demand destruction to energy caused by the coronavirus pandemic.
It’s that same demand worry that prompted OPEC+ head honcho Saudi Arabia to pass on an output hike for April at the group’s meeting on Thursday. The kingdom allowed only two countries — Russia and Kazakhstan — in the 23-nation oil producing alliance to raise output.
Traders had expected OPEC+ to endorse a hike of as much as 1.5 million bpd for April, including 1.0 million bpd for Saudi Arabia. But the hike the cartel agreed to was minimal — just 130,000 bpd for Russia and 20,000 for Kazakhstan. Saudi Arabia, on its part, opted instead to cut 1.0 million bpd next month, repeating what it had done for February and will be doing for March too.
On the whole, OPEC+ has been withholding at least 7 million bpd from the market over the past 10 months, significantly draining a glut in global crude inventories to near five-year normal levels. The alliance’s actions have succeeded in bringing U.S. crude from a historic negative pricing of -$40 per barrel in April 2020 to 13 month highs now.
Analysts are debating how long the Saudis themselves can continue making such cuts and potentially risk losing market share to more aggressive oil U.S. exporters, who aren’t a part of OPEC+. While shale output is down now, U.S. drillers can logically ramp up both output and exports with WTI trading at above $65 now.
Saudi Oil Minister Prince Abdulaziz bin Salman seemed to make a calculated bet on Thursday that U.S. drillers will not make a comeback like before to flood the market with a glut of supply as the industry was more keen in turning a profit with fewer barrels.
“‘Drill, baby, drill’ is gone forever,” the prince told Bloomberg in an interview, referring to the catchphrase often used to describe the prolific U.S. shale patch.
Abdulaziz appears right for now. actively drilling for oil have risen by less than 50 this year. This week itself, it grew by just one to reach 310. In March 2020, they were as high as 683, before collapsing to a low of 172 by August, as the Covid-19 crushed demand.