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US oil prices hit fresh two-year highs on Keystone pipeline outage

US oil prices hit fresh two-year highs on Keystone pipeline outage
November 24, 2017

SINGAPORE (Reuters) - US crude oil hit fresh two-year highs on Friday, as the shutdown of a major crude pipeline from Canada to the United States tightened North American markets.

Trading activity is expected to be very low on Friday due to the US Thanksgiving holiday.

US West Texas Intermediate  crude futures were at $58.37 a barrel at 0206 GMT, up 35 cents, or 0.6 percent from their last settlement. They reached a high of $58.58 a barrel early on Friday, the highest level since July 1, 2015.

Brent crude futures  were at $63.48, down 7 cents.

In a sign of a tightening market, both crude benchmarks are in backwardation, where spot prices are higher than those for future delivery, which makes it unattractive for traders to store oil for later sale.

The closure of the 590,000 barrels per day (bpd) Keystone pipeline following a spill last week has helped drive up US crude as it reduces stocks in the storage hub of Cushing, Oklahoma, traders said.

Markets have also been tightening globally due to an effort by the Organization of the Petroleum Exporting Countries (OPEC) and a group of other producers, including Russia, to withhold 1.8 million bpd of production.

The deal to restrict output expires in March 2018, but OPEC will meet on Nov. 30 to discuss its policy, and it is expected to extend the cuts.

“The Agenda for the OPEC meeting is out and it’s only a 3-hour meeting. That suggests that a broad consensus has been built and the meeting is really just a rubber stamp to agree the extension of the Saudis’ favoured 9-month extension period,” said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

Despite this expectation, McKenna said there was a slight risk of the collaboration derailing.

“Imagine though if all the tensions in the Middle East, between the Saudis and Iranians and between other Gulf states and Qatar, somehow derail the meeting. It’s a low probability high impact possibility,” he said.

Overall, however, analysts said market fundamentals were balanced, supporting prices.

“Oil market fundamentals are improving with... robust global demand growth of around 1.7 percent this year (and 1.5 percent in 2018, versus 1.3 percent this year),” US investment bank Jefferies said.

“Growth in US output of 900,000 bpd this year (and in 2018) should not overwhelm the market,” it added.

US oil production  has jumped by 15 percent since mid-2016 to a record 9.66 million bpd, thanks largely to shale drilling.

But Richard Robinson, manager of the Ashburton Global Energy Fund, warned growth could slow as operators struggle to get enough sand and water, both of which are needed in the shale production process, known as fracking.

“Logistics are a big bottleneck,” he said.