Oil prices rose on Tuesday on a lift from a weaker dollar and Middle East conflicts that also pushed Brent crude's premium to US crude to a record above $17 a barrel. US crude futures settled slightly higher after seesawing as news that Saudi Arabia planned to raise output in June regardless of the result of Opec's Wednesday meeting hemmed in US prices.
Investors tried to assess whether the Organisation of the Petroleum Exporting Countries would raise its production target only to codify current output above targets, or to signal intent to boost actual output and not just the target. The US dollar fell against a basket of currencies after a senior Chinese currency regulator warned about the risks of excessive dollar holdings, while equities rebounded as investors bought beaten-down shares.
The euro was supported by better-than-expected German factory data. "Opec raising production may already be priced in and Brent gets a lift from the euro strength and the weak dollar, and that market is more immediately affected by potential supply threats in the Middle East," said Richard Ilczyszyn, senior market strategist at Lind-Waldock in Chicago.
Brent crude for July delivery rose $2.30 to settle at $116.78 a barrel, recovering from an early $113.80 low. US July crude edged up 8 cents to settle at $99.09 barrel, after seesawing between $97.74 and $99.70, just below front-month crude's 100-day moving average of $99.73 and the 20-day MA of $99.67. Total crude trading volumes for both Brent and US contracts outpaced 30-day and 250-day averages.
US gasoline and heating oil futures also rose sharply, lifted by Brent's strength and refinery problems, particularly on the Texas Gulf Coast. Brent's premium to the US light sweet crude contract neared $18 a barrel, amid high inventories in the United States, especially at the Cushing, Oklahoma oil hub and delivery point for the US benchmark West Texas Intermediate (WTI) crude.
"It is the same old story. Oversupply in Cushing keeping WTI depressed while Brent is being used as an inflation hedge ... North Sea fundamentals are better than WTI as there have been some problems with Forties (crude) production," said Tom Bentz, director of BNP Paribas Commodity Futures Inc in New York.
Saudi Arabia expects to lift output by more than 500,000 barrels a day in June to its highest for three years, a senior Gulf industry official familiar with Saudi oil policy told Reuters. But Riyadh only had the support of its allies Kuwait and the United Arab Emirates among the 12-member cartel.
While Opec prepared to meet in Vienna, turmoil continued in Yemen, neighbour to Saudi Arabia, and Syria and Nato aircraft hit Libya's capital. Weekly oil inventory reports from industry and government are expected to show US crude stocks edged lower last week, with distillate stocks unchanged and gasoline stocks higher, according to a Reuters poll of analysts on Tuesday. The first snapshot of inventories will come from the industry group American Petroleum Institute at 4:30 pm (2030 GMT) on Tuesday.