Oil Prices Fall Amid Fears of a New Downtrend

By Timothy Puko Features Dow Jones Newswires

Oil prices flipped lower late Friday morning and into a sharp fall amid fears crude markets are entering a new downtrend.

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U.S. futures are now down in every session this week, shedding 7% since they hit a one-month high April 11. Many have been predicting a sustained rally and leaders of the Organization of the Petroleum Exporting Countries even came out this week to suggest further output cuts. The market's inability to rally despite all that now has momentum traders betting oil has further to fall, brokers and a trader said.

U.S. crude for June delivery recently traded down $1.07, or 2.1%, to $49.64 a barrel on the New York Mercantile Exchange, a three-week low. Brent, the global benchmark, gained $1.02, or 1.9%, to $51.97 a barrel on ICE Futures Europe.

"A lot of people thought there was another 50 cents to go in this rally, " said Ric Navy, senior vice president for energy futures at brokerage R.J. O'Brien & Associates LLC. "They've just given up the ghost."

Saudi Arabia Energy Minister Kalid al-Falih said Thursday that a handful of OPEC members have reached a tentative agreement to cut more supply. But other statements coming from OPEC leaders have equivocated too much to give traders confidence in the cartel's next move, with plenty of wiggle room left for members to agree to output cuts for only another three months -- instead of six -- or backtrack from an extension, brokers and analysts said.

A surprise addition to U.S. gasoline stockpiles reported Wednesday made the biggest difference in recent trade, sending prices down nearly 4% in one session. The report from the U.S. Energy Information Administration also showed slight production increases in the U.S. That reinforced widespread anxiety that U.S. shale producers are becoming more capable of increasing output even with prices half of what they were three years ago.

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Trend-spotters are on alert for another leg lower. Technical traders who move based on chart trends and momentum are likely adding to the selloff, brokers and a trader said. May's contract expired as the front-month future on Thursday, with prices turning lower and falling into expiration, something many will see as a bearish sign, especially after several other losing sessions in a row.

"If we settle under $50 a barrel today, it could be a risk-off type of thing" and the selling continues, said Tariq Zahir, who oversees $8 million as managing member of Tyche Capital Advisors LLC.

It is, however, hard to be too aggressively bearish with OPEC members planning to meet and possibly pass an extension just next month, Mr. Zahir added. But many did take note of how little the market rebounded Thursday after the Saudi energy minister's comments, and how a briefly rally quickly reversed Friday morning, potentially more bearish signs, brokers said.

"The [lack of] reaction can either be attributed to saturation, as such news is released on almost a daily basis, or to the fact that the foremost goal of the OPEC agreement -- namely to reduce the huge stocks of crude oil and oil products -- is still a long way from being achieved, " Commerzbank said in a note.

Global crude stockpiles remain above the five-year averages despite OPEC's aim to cut them back to those levels. Many analysts expect those stocks to start draining soon -- a delayed effect as OPEC's cuts from the first quarter are likely only now reducing the number of new oil shipments arriving at onshore storage sites. But the fact they are still high could spook the market into a further selloff if OPEC doesn't extend its effort to counter U.S. production, analysts said.

"The length of the extension, the number of participating countries and the production to be sidelined remain key unknowns," said Vivek Dhar, a commodities strategist at Commonwealth Bank of Australia. If an extension is only for one quarter, such a move may be moot for the market's long-term health since it means non-U. S. producers will increase output anew, potentially sending stockpiles higher again.

Gasoline futures recently fell 1.2% to $1.65 a gallon and diesel futures fell 1.8% to $1.5502 a gallon.

--Sarah McFarlane, Jenny W. Hsu and Georgi Kantchev contributed to this article.

Write to Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

April 21, 2017 12:20 ET (16:20 GMT)