THE WALL STREET JOURNAL

Oil Prices Supported by Gasoline Demand

Gains capped as Saudi Arabia slashes prices


By Nicole Friedman and Georgi Kantchev / Updated Oct. 5, 2015 4:08 p.m. ET


NEW YORK—Oil prices rose Monday on a drop in Midwest gasoline supplies and a largerthan-
expected cut in U.S. production capacity.


Gains, however, were capped after Saudi Arabia’s decision Sunday to slash prices, intensifying
the global fight for market share that has battered oil prices since last year.


Oil prices have plunged in the past year owing to a global oversupply of crude, which has forced
producers to lower prices to attract buyers and put large amounts of oil in storage. While demand
has climbed this year and U.S. output has started to fall from recent highs, analysts say the
surplus of crude is likely to persist into next year.


Light, sweet crude for November delivery settled up 72 cents, or 1.6%, to $46.26 a barrel on the
New York Mercantile Exchange.


Brent, the global benchmark, rose $1.12, or 2.3%, to $49.25 a barrel on ICE Futures Europe.
Gasoline futures registered the largest price gains, settling up 4.39 cents, or 3.3%, at $1.3853 a
gallon.


Unexpected refinery outages in the Midwest have pushed up fuel prices in the region.
“Gasoline prices in the Midwest are soaring this morning as supply tightness in the region
persists,” said Mansfield Oil Co. in a note.


Gasoline production typically falls at this time of year, as refineries shut down units to perform
seasonal maintenance. “Refinery maintenance has limited the amount of product entering the
system, thus leaving the region vulnerable to a price spike,” Mansfield said.


Nationwide, average retail gasoline prices fell 0.1 cent to $2.29 a gallon on Monday, according
to AAA. The motor club said in a news release Monday that prices in the Midwest “should
remain relatively volatile as the maintenance continues.”


A drop in U.S. oil drilling also boosted prices. The number of rigs drilling for oil in the U.S.
dropped by 26 to 614 last week, extending a recent streak of declines, Baker Hughes Inc.
reported Friday. The number of U.S. oil-drilling rigs, which is viewed as a proxy for activity in
the oil industry, has fallen by about 62% since a peak of 1,609 last October.


Based on the rig count, Goldman Sachs said Friday that it expects U.S. production in 2016 to fall
by 225,000 barrels a day compared with this year’s level. A week earlier, the bank called for
2016 production to be 185,000 barrels a day lower year-over-year.


Oil investors have closely watched U.S. production this year to see when spending cuts would
lead to lower production. U.S. output has been more resilient than many expected owing to
increased drilling efficiency and cost savings.


However, the latest data “has many convinced that operators are now capitulating” and are
unable to maintain their production at current prices, said TAC Energy in a note.


Despite the decline in the U.S., other major producers continue to pump oil at a rapid pace,
adding to the global oversupply of crude. Last week, Russia said it produced oil in September at
levels not seen since the fall of the Soviet Union, pumping an average of 10.74 million barrels a
day.


And on Sunday, Saudi Arabia made sharp reductions to the prices it charges for its oil as
members of the Organization of the Petroleum Exporting Countries battle to keep their share of
the last growing markets in Asia.


The move came as Iran, Iraq and other countries in the Middle East made deeper cuts in their
official prices than Saudi Arabia last month, exacerbating the concerns that production will
continue to outpace demand and further depress oil prices, which have shed about half of their
value since last summer.


Diesel prices rose 2.84 cents, or 1.9%, to $1.5483 a gallon.


—Benoît Faucon contributed to this article.


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES.