Crude Oil Gaps Higher on Growing Expectations of Production Freeze

May WTI Crude Oil futures gapped higher on Wednesday, reaching a high of $36.92 before settling at $36.83, up $0.94 or 2.62%.  Brent futures closed at $38.59. The catalyst behind the rally was growing expectations that exporters will agree to freeze their output amid global oversupply, although Iran’s plans to boost production are seen as capping bigger price gains.

Traders bid the market higher shortly before the opening after the Kuwaiti governor for the Organization of the Petroleum Exporting Countries (OPEC), Nawal Al-Fuzaia, said on Tuesday that there were “positive indications an agreement will be reached” during a producer meeting scheduled for April 17 in Qatar.

Traders are treating the strong opening as short-covering and position-squaring, suggesting that buyers remain cautious ahead of the April 17 meeting. One problem that long-term buyers are having with the production freeze is that it is not a cut in production. This would have a far greater impact on prices.

The other problem is with Iran. It has gone on the record as saying it has no intention of slowing its production after crippling sanctions against it were lifted in January.

Iranian Oil Minister Bijan Namdar Zanganeh said the country’s crude output would reach 4 million barrels per day (bpd) by March 2017, state television reported on Wednesday, with plans to export 2.25 million bpd of those supplies. That would be up from a little over 1 million bpd under the sanctions and only slightly below pre-sanctions peaks of 2.5 million bpd.

In other news, the American Petroleum Institute, an industry trade group, on Tuesday reported that U.S. inventories of crude fell by 4.3 million barrels in the latest week, according to news reports. Analysts surveyed by oil data firm Platts had forecast a 2.9 million barrel increase in inventories.

The API report showed the largest drawdown since January 1, yet Cushing showed a larger than expected (100,000) barrel build of 620,000 barrels and gasoline’s drawdown was small at -116,000.

Wednesday’s closely watched U.S. Energy Information Administration’s weekly report is expected to show inventories rose by 3.150M barrels. This is up from last week’s 2.299M increase.

In other markets, Asian stock indices turned higher on Wednesday as oil prices advanced and activity in China’s services sector showed signs of a pick-up. Australia’s ASX 200 was up 0.54 percent. Japan’s Nikkei 225 traded sideways before trading up 0.28 percent on the back of a slightly weaker yen. Chinese mainland markets were mixed with the Shanghai composite flat and the Shenzhen composite up 0.36 percent.