Oil Prices Under Pressure from Supply Concerns

Features Dow Jones Newswires

Oil prices fell to touch the three-month intraday low Monday with the brief stability in global markets that followed the U.S. presidential election giving way to revived concerns about oversupply. 

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U.S. crude for December delivery recently lost 49 cents, or 1.1%, to $42.93 a barrel on the New York Mercantile Exchange. Its low trade of $42.55 from just after 8 a.m. ET tied the lowest price since mid-August. Brent, the global benchmark, lost 39 cents, or 0.9%, to $44.36 a barrel on ICE Futures Europe. 

Most of the negativity comes in one way or another by the Organization of the Petroleum Exporting Countries, analysts said. Most remain deeply skeptical that OPEC will be able to cut production to between 32.5 million and 33 million barrels a day, as it proposed in late September. 

Several members and potential ally Russia have all increased production dramatically in just the less than two months since then. It demonstrates how aggressively competitive for customers and how reliant on oil revenue those countries, undermining the chances of cooperation that has repeatedly lifted oil prices from lows throughout 2016, analysts said. 

"That narrative has finally run its course. Finally, no one believes OPEC will get it together," said Stephen Schork, editor of energy trade publication the Schork Report. 

With OPEC members staking out claims to their territory, the cartel produced 33.64 million b/d in October, according to Germany's Commerzbank. This has caused global oversupply to reach 950,000 b/d and means that OPEC will have to cut more production than anticipated when it meets in Vienna on Nov. 30. 

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Other market watchers believe that OPEC should abandon its pledge to cut production as it becomes more apparent that the proposed cuts are almost impossible to impose and enforce. 

Bjarne Schieldrop, commodities analyst at Sweden's SEB bank, said that lower oil prices have meant that OPEC has created more demand for its oil. He added that with Libya and Nigeria on the verge of bringing significant additional volumes to the market, it would make more sense to postpone any cuts for now and revisit the situation in 2017. 

"In our view it is probably a better strategy for OPEC to let its production rise to its natural level [of between 35.5 to 36 million b/d] and let the oil price stay muted for a little while longer, thus avoiding reactivating U.S. shale oil production too early," he said. 

U.S. oil producers are already responding. They keep putting more rigs into drilling fields and their production, which has been in steady decline for months, rose 2% in the week ended Nov. 4, the U.S. Energy Information Administration said last week. 

Also the dollar is making a strong move higher since the election. The Wall Street Journal Dollar Index, which tracks the buck against 16 other currencies, is up another 0.8% Monday. A stronger U.S. currency makes dollar-traded oil more expensive for foreign buyers, and so its price tends to fall as the dollar rises. 

Several other markets, including metals, equities and bonds, have also rallied since the election, and oil's break from those markets so decisively lower demonstrates how concerned oil traders are about oversupply, analysts said. They also pointed to front-month contracts falling further than longer-term futures, which is also typically a sign of glutted markets. 

"That's all bearish news," said Jim Ritterbusch, president of energy-advisory firm Ritterbusch Associates. Renewed, public commitment from OPEC may be the only catalyst that could staunch losses in the coming weeks, he added. "OPEC really hasn't come out yet with a strong statement that they are going to be able to patch a deal together." 

Gasoline futures recently lost 0.7% to $1.2967 a gallon and diesel futures lost 0.4% to $1.3952 a gallon. 

Write to Timothy Puko at tim.puko@wsj.com and Kevin Baxter at Kevin.Baxter@wsj.com

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