Oil Retreats on Oversupply Fears
Posted by hkarner - 23. März 2017
Source: The Wall Street Journal
Accelerating production in the U.S. and large global inventories are driving prices of crude futures lower
U.S. crude futures fell to a four-month low Tuesday, with stubbornly large global inventories and accelerating production in the U.S. reigniting a selloff.
Oil prices have slumped more than 11% in just two weeks, dragged lower by rising shale-oil production and inventories in the U.S. The downward movement has wiped out some of the gains reaped since the Organization of the Petroleum Exporting Countries and Russia last year agreed to cut 1.8 million barrels of their daily production in the first half of 2017.
Without falling U.S. inventories, many commodity traders have started to bail out of the market. That selloff gained more momentum Tuesday, following equities lower, as political conflict in Washington caused traders to become more skeptical of high hopes for new legislation to stoke economic growth and energy demand.
Light, sweet crude for April delivery settled down 88 cents, or 1.8%, at $47.34 a barrel on the New York Mercantile Exchange. That is the lowest settlement since Nov. 14. U.S. prices fell 13 times in the last 16 sessions.
The April contract expired at settlement. The more actively traded May contract settled down 67 cents, or 1.4%, to $48.24 a barrel.
Brent crude, the global benchmark, lost 66 cents, or 1.3%, to $50.96 a barrel on ICE Futures Europe. It is down nine of the past 11 sessions and at its second-lowest settlement of the year.
Traders and analysts are broadly questioning whether OPEC and other big exporters are coming through on their plans to cut output. ING Bank put compliance in OPEC outside of Saudi Arabia at just around 70% and outside of OPEC at just 43%. There is also concern those countries will abandon quotas to compete with rising production coming out of the U.S.
Mizuho Securities USA Inc. trimmed its price forecast Tuesday, citing those concerns. It forecasts U.S. crude at $54 a barrel this year, down from $55.
Pump jacks and other infrastructure for producing oil dot fields outside of Watford City, North Dakota. Top U.S. shale producers are pushing fracking technology to new extremes.
“We believe the resurgence of U.S. production and uncertainty on U.S. oil inventories and OPEC’s quota adherence will continue to weigh on global oil markets,” Mizuho analyst Timothy Rezvan wrote in a note.
Oil also joined a broader selloff that put stocks on course for their worst day since October. Investors and analysts say the prospect that House Republicans will be unable to gather the votes they need this week to dismantle the Affordable Care Act is adding to doubts that Mr. Trump will be able to push through tax cuts. That could put further pressure on stocks that have been trading near records and at historically high valuations
“It brings into doubt the rosy demand expectations” for oil, said Bart Melek, head of commodity strategy at TD Securities in Toronto. “If America is growing as fast as hoped, they’re probably not going to import as much stuff.”
In the week ended March 14, speculative short positions — a bet that prices will fall — in WTI crude futures held by money managers almost doubled to 128,947 contracts, based on data from the U.S. Commodity Futures Trading Commission.
“The switch from long to short positions shows that fund managers are losing confidence in the OPEC deal,” said Jonathan Chan, an analyst at Phillip Futures.
A major factor behind the bearish sentiment is the recovery in U.S. shale production after a two-year lull. The most recent data showed U.S. output remained above 9 million barrels for the past four weeks while inventories rose to 528.2 million barrels. This means the U.S. increased its output by 412,000 barrels a day since the OPEC-Russia production cut agreement was signed.
Analysts and traders surveyed Tuesday by The Wall Street Journal said they expect U.S. crude stocks to balloon by another 2.1 million barrels in the week ended March 17. If data from the U.S.’s Energy Information Administration due Wednesday shows a rise, it would be the 10th consecutive weekly increase.
The American Petroleum Institute, an industry group, said late Tuesday that its own data for the week showed a 4.5 million-barrel rise in crude supplies, a 4.9-million-barrel decrease in gasoline stocks and an 883,000-barrel fall in distillate inventories, according to a market participant.
Rising production elsewhere is also weighing on prices. Libya’s state-owned National Oil Corp. reportedly said loading at its two major oil ports is set to resume following recent conflicts with local insurgents, Reuters reported.
A strong flow of oil from the U.S. and Africa could encourage OPEC to extend the agreement beyond the initial six-month period, but if Russia bails, the deal could flop, said Stuart Ive, a client manager at OM Financial.
But traders have been overly concerned about recent rhetoric and falling sales prices out of Saudi Arabia, Citigroup Inc. analysts wrote in a note Tuesday. They said a lot of the recent losses are just from speculators bailing out of a crowded trade and that oil prices can move up again once the OPEC cuts really start to affect inventories, driving them lower, over the next three months.
“We believe the Saudis remain committed to supporting prices through the end of this year and recent comments from other OPEC producers implying expectations for the cuts to be extended support this view,” said the group, led by Ed Morse.
Gasoline futures fell 0.61 cent, or 0.4%, to $1.6052 a gallon. Diesel futures fell 1.08 cents, or 0.7%, to $1.5033 a gallon.