Oil prices extend gains on compliance with output cuts

TOKYO, Feb 02 (Reuters): Oil rose for a third day on Friday after a survey showed strong compliance with output cuts by OPEC and others including Russia, offsetting concerns about surging US production.

Brent futures, the global benchmark, were up 24 cents, or 0.3 per cent, at $69.89 a barrel by 0635 GMT.

US West Texas Intermediate (WTI) crude was up 33 cents, or 0.5 per cent, at $66.13 a barrel.

Production by the Organisation of the Petroleum Exporting Countries (OPEC) rose in January from an eight-month low as higher output from Nigeria and Saudi Arabia offset a further decline in Venezuela and strong compliance with a supply reduction pact, a Reuters survey showed.

OPEC pumped 32.4 million barrels per day (bpd) in January, the survey found, up 100,000 bpd from December. Last month's total was revised down by 110,000 bpd to the lowest since April 2017.

Even so, adherence by producers included in the deal to curb supply rose to 138 per cent from 137 per cent in December, the survey found, suggesting commitment is not wavering even as oil prices hit their highest level since 2014.

"It underscores the commitment of the cartel, and their Russian partners, to keep a floor under the oil price," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.

That is drawing investors' focus away from the rise in US production.

US crude output surpassed 10 million bpd in November for the first time since 1970, the Energy Information Administration said this week.

Another report from New York adds: Surging shale oil production in Texas and North Dakota is being felt on trading desks in Chicago, Houston and New York, where a brisk business in West Texas Intermediate crude futures is far outpacing contracts for London-based Brent crude.

As the United States (US) approaches a record 10.04 million barrels of daily production, trading volumes of so-called "WTI" futures exceeded volumes of Brent crude in 2017 by the largest margin in at least seven years.

A decade ago, falling domestic production and a US ban on exports meant that WTI served mostly as a proxy for US inventory levels.

"There was a time when the US was disconnected from the global market," said Greg Sharenow, portfolio manager at PIMCO, who co-manages more than $15 billion in commodity assets.

Two changes drove the resurgence of the US benchmark. One was the boom in shale production, which spawned a multitude of small producers that sought to hedge profits by trading futures contracts. Then two years ago, the United States ended its 40-year ban on crude exports, making WTI more useful to global traders and shippers.

US exports averaged 1.1 million barrels a day through November 2017, rising to an average 1.6 million bpd in the final three months. That compares to just 590,000 bpd in 2016.

As US production and exports grow, global firms that increasingly buy US oil are offsetting their exposure by trading in US financial markets. That also gives US shale producers more opportunity to lock in profits on their own production.

The US boom has reignited a competition over oil trading that began in the 1980s between two of the world's biggest exchange operators - Intercontinental Exchange, and the New York Mercantile Exchange, or NYMEX, which was acquired by Chicago-based CME Group in 2008.

For ICE and CME, energy represents the second-biggest source of revenue, trailing only stocks and interest rate trading, respectively. ICE is based in Atlanta, but is known for its European contracts after it bought London's International Petroleum Exchange and its Brent futures contract in 2001.