Oil futures settled higher Tuesday after Iraq's oil minister said Saudi Arabia and Russia were showing greater "flexibility" over production levels, lifting hopes an output cut could be forthcoming.
NYMEX March crude settled $1.11 higher at $31.45/b. ICE March Brent settled up $1.30 at $31.80/b.
NYMEX February ULSD settled 3.24 cents higher at 96.77 cents/gal, while NYMEX February RBOB settled up 1.72 cents at $1.0472/gal.
Another factor behind Tuesday's move higher could be the entry of fresh buying interest after crude prices fell steadily for weeks, according to Stephen Schork, publisher of the Schork Report.
"We had a prolonged move in one direction and it seems like the market was oversold," he said.
Officials from Saudi Arabia and Russia have each softened their respective stances regarding the current policy of increasing export volumes to compensate for lower oil prices, Iraq Oil Minister Adil Abdul-Mahdi said Tuesday on the sidelines of a conference in Kuwait.
"We should [first] see confirmation of this flexibility," he added when asked about the prospects for the world's two largest oil exporters cooperating on production cuts.
Some analysts were skeptical the Iraq oil minister's comments amounted to evidence that any coordinated production cut would happen soon.
"Given the lack of coordination among oil producers for over a year, it seems a bit odd that such reports are being taken seriously," Confluence Investment Management said in a note.
"History shows that the Saudis tend to lead recoveries by leading the cuts in output. Thus far, there is no indication from Saudi Arabia that it is prepared to cut output to bolster prices, but that doesn't mean it won't occur at some point," the investment group said.
In a recent interview with Al Arabiya, Saudi Aramco's chairman, Khalid al-Falih, said he saw the oil market rebalancing in 2016.
However, al-Falih cited declines in shale production and demand growth at 1.2 million-1.5 million b/d as likely drivers, offering no hints that Saudi Arabia was prepared to lower its output to fix the oversupply.
The Dow Jones Index was higher Tuesday. A tight correlation between oil and equities has formed, though some analysts say the logic behind that relationship has become circular.
"Fears of a sharp slowdown in economic growth, particularly in China, are dragging down global stock markets from arguably overheated levels," Energy Aspects said in a note this week.
"This is weighing on other risky assets, including oil, which, in turn, is leading to sharp falls in energy companies' share prices, creating a negative feedback loop," it added.
On the contrary, low oil prices should be seen as a net boon to the global economy, the consultancy said.
"The top four net oil importers account for over 50% of global GDP and have a higher propensity to consume and invest than oil exporters. So, the growing fear that low prices will hurt global growth, weighing back on oil, is misplaced," it said.
Investor concerns about China have centered on the country's transition away from manufacturing toward services, which will reduce its appetite for oil products, such as diesel.
China's gasoil demand in 2016 is expected to rise by only 0.4% to 175.7 million mt, according to a report released Tuesday by state-owned China National Petroleum Corp.'s Economics and Technology Research Institute. In 2015, gasoil demand inched 0.8% higher.
China's crude demand should rise 4.3% this year to average 11.37 million b/d. On a percentage basis, that would represent a slowdown from 2015, when China's crude demand grew by 5.6% on an annual basis.
COST OF MARCH CRUDE OPTIONS FALLS
After settling as low as $26.55/b last week, front-month NYMEX crude has risen in three of the last four sessions, keeping alive speculation that crude futures may have found a bottom.
One consequence of the surge above $30/b has been the reduced cost to purchase crude options that provide downside protection.
The $25 March put was around 22 cents Tuesday, down from 78 cents on January 20 when NYMEX crude settled at $26.55/b, according to data provider GlobalView.
A decrease in the premium for $25/b puts was unsurprising because the strike price moved further out of the money.
Traders took advantage of the cheaper premium to secure the right to sell crude futures at $25/b just in case prices reversed course.
Open interest for $25/b puts soared on Friday from 21,151 contracts to 29,021 contracts. On the same day, the premium fell 33 cents to only 17 cents.
Anyone who bought $25/b puts in early January could have profited from the rise in premiums that lasted until January 20.
A number of traders may have decided to close their positions when the premium peaked at 78 cents. That would explain why open interest decreased 1,933 contracts that day to 19,794 contracts.
