Oil prices rose on Friday as traders expected OPEC-led production cuts to extend beyond the middle of this year.
The relative cost of options protecting against a drop in West Texas Intermediate crude has fallen to its lowest since August, thanks to a big drop in producer hedging, Societe Generale SA said on Friday.
"We saw the biggest draw in (US) inventories for the year last week with stockpiles down more than five million barrels, and it looks like OPEC's production cut is finally biting", said Greg McKenna, chief market strategist at brokerage AxiTrader.
The Organization of the Petroleum Exporting Countries, Russia and other producers agreed previous year to curb production by 1.8 million barrels per day (bpd) for six months from January 1. Yet with scant evidence that OPEC production cuts are actually tightening oil markets as expected, the capitulation of speculative length has seemingly dominated price action this week.
US crude oil production C-OUT-T-EIA has already risen by over 10 percent since its mid-2016 trough, to more than 9.3 million bpd, close to levels of top producers Russian Federation and Saudi Arabia.
"Prices have come up quite a bit this week, and it looks like the market just ran out of steam", Kyle Cooper, director of research with IAF Advisors in Houston, said by telephone. Saudi Arabia, the de-facto OPEC leader, has said it expects cuts to be extended. USA light crude oil was up 7 cents at $47.90.
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Despite this, analysts warned that markets remained well supplied. Reports from the Energy Information Administration showed that USA stockpiles were down almost 5.2 million barrels, a huge difference from the 1.8 million barrels expected. Prices are still up from about $48 a year ago.
Iran Heavy, one of the country's main oil export grades, has recorded an average of $51.57 per barrel in 2017, up nearly 60% compared to the previous year in which global benchmark Brent plummeted to 12-year-lows.
Lipow said the market was also "slowly taking note" of increased production in Canada.
The only good thing for oil prices to change its course now is the summer driving season in the U.S. which would result in incremental demand for gasoline and in turn the reduction in oil inventories.
Meanwhile, OPEC kingpin Saudi Arabia has been sending positive signals to the market in a bid to prop up prices, in the run up to a meeting on May 23 to extend the output cuts they had first been orchestrated at the start of the year.
"Owing to the rapid recovery in U.S".