Oil Declines on Skepticism Over Extension of OPEC Output Cut
27 March 2017 - 8:39PM
Dow Jones News
By Neanda Salvaterra, Jenny Hsu and Timothy Puko
Crude prices inched lower Monday, weighed down by investor
skepticism that major oil producers will extend a deal to curtail
global supply beyond June.
Light, sweet crude for May settled down 24 cents, or 0.5%, at
$47.73 a barrel on the New York Mercantile Exchange. Its intraday
low of $47.08 a barrel was within 10 cents of a low dating back to
late November, but it pared losses in the late morning.
Brent crude, the global benchmark, lost 5 cents, or 0.1%, to
$50.75 a barrel on ICE Futures Europe. Both benchmarks have lost
ground in five of six sessions.
Over the weekend, a monitoring committee that oversees the
Organization of the Petroleum Exporting Countries' compliance with
a deal to cut global production by 1.2 million barrels a day issued
a statement directing oil producers to "review the oil market
conditions," regarding the possible extension of the cuts. Several
OPEC members announced support for an extension.
Market participants may have expected the committee to
immediately recommend an extension of the supply cut amid rising
global inventories and soft oil prices. OPEC's ability to reign in
its own high production, and counteract rising inventories and
output in the U.S. are in question, according to the Chicago
brokerage iiTrader.
"Maybe the committee realized, as we have stated, how
catastrophic it will be for the market to begin talking about
further cuts and fail to follow through," it said in a note to
clients Monday. "We remain bearish and believe $40 is in the
cards."
The committee will reconvene again in late April to complete
their recommendation for a possible extension of OPEC's supply
action. The final decision will be taken by the oil cartel on May
25.
The five-member oversight committee also urged OPEC members to
fully comply with their pledges to cut oil supply from the
market.
"More has to be done," said Kuwaiti Oil Minister Issam A.
Almarzooq, chairman of the group's compliance committee, in a
speech distributed by OPEC. "We need to see conformity across the
board. We assured ourselves -- and the world -- that we would."
The deal, which stipulates OPEC and 11 other outside suppliers
cut their cumulative supply by 1.8 million barrels a day in the
first six months of this year, was struck late last year after
prices had been stuck in a two-year slump.
The pact faced a high degree of skepticism given OPEC members
are notorious for turning their backs on production quotas.
However, various data indicate compliance levels among signatories
has reached 94% so far.
But oil prices have continued to sag. The reason: rising U.S.
production.
Crude production in the U.S. has been rising steadily since the
beginning of the year.
Data shows production there has stayed above the
9-million-barrel mark for the past four weeks. Future production
also appears to be well on track. In the week ended March 24, U.S.
drillers activated 21 more oil rigs, marking the 10th straight week
they have increased, to a total of 652.
Amid rising U.S. production, market participants are
increasingly skeptical "that either a rollover of the cuts can be
agreed or that it would have a lasting and significant impact on
balances," said JBC analysts in a recent report.
That isn't true across the board, however. Goldman Sachs Group
Inc. sent a note late Sunday saying it didn't think current supply
and demand warrants an extension barring sharply slowing demand
growth or sharply rebounding production in Libya or Nigeria. OPEC
compliance has been high and global economic growth is strong
enough to support strong demand growth, the bank's commodity
research team said.
"We believe that the rebalancing of the oil market is in fact
making progress despite the record high U.S. crude inventories,"
Goldman analyst Damien Courvalin wrote. "Further, we forecast that
OECD inventories on a days of demand cover will reach their 5-year
average level by year-end even with OPEC bringing production back
online in" the second half of 2017.
Gasoline futures gained 1.41 cents, or 0.9%, to $1.6189 a
gallon, highest settlement in a week. Diesel futures gained 0.49
cent, or 0.3%, to $1.5025 a gallon.
Michael Amon contributed to this article
Write to Neanda Salvaterra at neanda.salvaterra@wsj.com, Jenny
Hsu at jenny.hsu@wsj.com and Timothy Puko at tim.puko@wsj.com
(END) Dow Jones Newswires
March 27, 2017 15:24 ET (19:24 GMT)
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