Oil Tumbles Under Weight of Growing U.S. Output

By Sarah McFarlane and Jenny W. Hsu Features Dow Jones Newswires

Crude futures eased Monday, knocked by concerns whether ongoing production cuts by producers in the Middle East and Russia was enough to offset the increasing U.S. oil being pumped into the still oversupplied market.

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Brent crude, the global oil benchmark, fell 0.3% to $51.90 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 0.2% at $49.22 a barrel.

Trading is expected to be muted across the board as several markets in Asia and Europe are closed today for a public holiday.

U.S. output continues to steadily increase with the latest data from industry group Baker Hughes on Friday showing rigs drilling for oil in the U.S. rose again by nine last week. At 697, the volume is double from the low it fell to less than a year ago.

Analysts say the market is caught between the rising U.S. production and the curtailed output from the Organization of the Petroleum Exporting Countries and other heavyweights like Russia.

"You have a well-established recovery in U.S. shale sector that is most certainly diluting the impact of OPEC's efforts," said Harry Tchilinguirian, head of commodity strategy at BNP Paribas SA.

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The OPEC-led effort to tighten the oil market has slowed down the growth of global inventories but stocks are still nowhere near the five-year averages, a level that OPEC is striving for, making it likely that the group will agree to extending its cuts when it meets May 25.

Iran Saturday joined the growing circle of OPEC members indicating they would support an extension. For its part, Iran agreed to cap its production at 3.8 million barrels per day in the first half of 2017, which was slightly higher than its October baseline. Nigeria and Libya were also exempt from the cuts.

The general market expectation is for the consortium to further curtail their production after June, but several questions still loom, including the length of the extension, quotas for the individual producers, and the continuing support of non-OPEC members such as Russia.

"Iran wasn't really the hurdle, when you look at the other OPEC members and how they discussed the extension, what is more important is Russia," Mr. Tchilinguirian said.

In the initial agreement Russia agreed to cut output by 300,000 barrels a day.

"If an extended production agreement is reached...then the market would remain supported in the second half of the year," said Stuart Ive, a client manager at the New Zealand-based OM Financial.

Nymex reformulated gasoline blendstock -- the benchmark gasoline contract -- fell 0.4% to $1.54 a gallon. ICE gasoil changed hands at $451.75 a metric ton, down $2.25 from the previous settlement.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com and Jenny W. Hsu at jenny.hsu@wsj.com

Crude futures tumbled Monday, weighed down by falling gasoline prices and by concerns about increasing U.S. oil being pumped into the still-oversupplied market.

U.S. crude futures fell 73 cents, or 1.48%, to $48.60 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, was down 81 cents, or 1.56%, at $51.24 a barrel on London's ICE Futures.

U.S. refiners have ramped up their output and have been processing more crude oil than ever before. But the result has been big increases in gasoline stockpiles, which could become a drag on crude.

Gasoline futures recently traded down 3.06 cents, or 1.98%, to $1.5175 a gallon.

"The gasoline situation is very negative here, and getting worse by the minute," said Bob Yawger, director of the futures division of Mizuho Securities USA. "There are big amounts of gasoline, and not necessarily a big demand number on the other side of the equation to wipe it out."

Production cuts by the Organization of the Petroleum Exporting Countries haven't cleared a glut of crude as quickly as many expected, and analysts said the market is caught between OPEC's curtailed production and rising U.S. output.

The OPEC-led effort to tighten the oil market has slowed down the growth of global inventories but stocks are still nowhere near the five-year averages, a level that OPEC is striving for.

At the same time, U.S. output continues to steadily increase with the latest data from industry group Baker Hughes on Friday showing rigs drilling for oil in the U.S. rose again by nine last week. At 697, the volume is double from the low it fell to less than a year ago.

"You have a well-established recovery in U.S. shale sector that is most certainly diluting the impact of OPEC's efforts," said Harry Tchilinguirian, head of commodity strategy at BNP Paribas SA.

That adds to the pressure on OPEC to agree to extending its cuts when it meets May 25.

Iran on Saturday joined the growing circle of OPEC members indicating they would support an extension. For its part, Iran agreed to cap its production at 3.8 million barrels a day in the first half of 2017, which was slightly higher than its October baseline. Nigeria and Libya were also exempt from the cuts.

The general market expectation is for the consortium to further curtail their production after June, but several questions still loom, including the length of the extension, quotas for the individual producers, and the continuing support of non-OPEC members such as Russia.

"Iran wasn't really the hurdle, when you look at the other OPEC members and how they discussed the extension, what is more important is Russia," Mr. Tchilinguirian said.

In the initial agreement Russia agreed to cut output by 300,000 barrels a day.

"If an extended production agreement is reached...then the market would remain supported in the second half of the year," said Stuart Ive, a client manager at the New Zealand-based OM Financial.

Write to Alison Sider at alison.sider@wsj.com, Sarah McFarlane at sarah.mcfarlane@wsj.com and Jenny W. Hsu at jenny.hsu@wsj.com

(END) Dow Jones Newswires

May 01, 2017 11:36 ET (15:36 GMT)