Oil Tumbles as OPEC Cuts Disappoint

By Jon Sindreu Features Dow Jones Newswires

Crude prices fell Thursday after major oil producers extended output cuts by less than some investors had hoped, with some analysts questioning whether the deal will be enough to break the market out of its current range.

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The Organization of the Petroleum Exporting Countries on Thursday renewed an agreement to withhold some crude-oil supplies into March 2018, people familiar with the matter said, doubling down on its bet that it can raise prices despite soaring output from American shale producers.

U.S. crude oil dropped 1% to $50.85 a barrel, while Brent crude, the global benchmark, fell 0.8% to $53.52 a barrel.

Oil futures are likely to remain volatile through Thursday, with non-OPEC producers, including Russia, slated to meet with the cartel to decide on their own output levels later in the day.

Thursday's agreement will extend by nine months a deal made at the end of last year to cut oil production. Oil prices had already edged down earlier, when Saudi energy minister Khalid al-Falih said it was "highly likely" this would be the decision of OPEC, which is meeting in Vienna.

"The problem was that OPEC had come up with a statement saying they'd do 'anything it takes,' so people were expecting just a little bit more from the meeting," said Nitesh Shah, commodities strategist at ETF Securities, who believes crude is unlikely to go much above $55 this year.

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Stuart Ive at OM Financial said oil is likely to trade from $50 to $60 a barrel in the near term due to the extension. For a further rally OPEC and partners would have needed to cut more, he said.

Still, many analysts also pointed out that Thursday's decision had been well telegraphed by Saudi Arabia. That suggests that OPEC has been successful in reaching consensus, a positive going forward.

"The bottom line is that Saudi has managed to get a consensus ahead of the meeting for this meeting to take place in a non-confrontational way, " said Harry Tchilinguirian, oil strategist at French bank BNP Paribas. "We've never had this consensus going into this OPEC meeting for a long time."

Mr. Tchilinguirian thinks oil prices will go above $60 this year, and left the forecast untouched after the announcement. So did consultancy Wood Mackenzie, which believe prices will be $55 this year.

After gaining some 20% on the back of last December's cuts, crude has traded between $48 and $57, as greater optimism about global demand has been offset by larger-than-expected stockpiles. OPEC aims to cut them back to their five-year average, but this target has so far proved elusive.

The budgets of major producers, like Saudi Arabia, have been under pressure from a reduction of oil revenue since prices plummeted in 2014. OPEC and its allies want to push prices up by freezing output, but higher prices induces greater competition from U.S. shale producers, which are leaner and faster operations, which then pressures the market lower. Despite OPEC's cuts, stockpiles have risen above historical averages.

Still, many analysts believe that concerns about inventories will ease as demand picks up further this summer.

"If they can keep prices in this range until demand picks up, and not suffer too much, maybe they can push prices to $70 and even $80 in a few years," said Michael Poulsen, oil risk manager at Denmark-based Global Risk Management.

U.S. crude inventory data released Wednesday by the Energy Information Administration was broadly upbeat for producers, showing the lowest overhang since December 2014.

"All of the sudden, reducing OECD stocks to the 5-year average by March next year does not seem mission impossible," said Tamas Varga, analyst at London-based PVM brokerage.

Nymex July diesel futures dropped 0.5% to $1.605 and ICE gasoil lost 0.7% to $476.75 per metric ton.

Biman Mukherji contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com

Oil prices declined sharply on Thursday after an agreement among major oil producing nations to extend output cuts failed to appease investors, who had hoped for more action from the cartel to support prices.

The Organization of the Petroleum Exporting Countries renewed a deal with other non-OPEC producers to cap production into March 2018 on Thursday, continuing an attempt to mitigate a global supply glut and support oil prices.

But in the biggest one-day loss since May 4, oil prices fell to a one-week low following the Thursday meeting. Light, sweet crude for July delivery lost $2.46, or 4.8%, to $48.90 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell $2.50, or 4.6%, to $51.46 a barrel.

Many investors were taken aback by the big swing, since OPEC did exactly what its leaders suggested it would do in the weeks leading up to the meeting. Oil prices began to climb last week after Russia and Saudi Arabia announced that they would push for a nine month extension to the deal, hitting a one-month high Tuesday. Previously, OPEC had only said it would consider extending its agreement by six months.

But by signaling its willingness to commit to a longer cut, OPEC may have unintentionally raised expectations even higher, some investors said. In the days leading up to the meeting, some analysts suggested that OPEC could agree to reduce output further, fold in smaller producers that sat out the first round of cuts, like Egypt, or extend the cuts for a full year.

"The anticipation of deeper cuts started to disseminate into investor thought, that it was only deeper cuts that would take us higher," said Chris Kettenmann, chief energy strategist at Macro Risk Advisors.

Comments by OPEC ministers may have also bolstered expectations that major producers would strike a more dramatic deal Thursday. Iraq Oil Minister Jabbar al-Lueibi said there were "three or four options" to discuss at Thursday's meeting. Some, including Russian Energy Minister Alexander Novak, suggested 12 months of cuts were being considered. Earlier this month, Saudi Arabia's oil minister said producers would do "whatever it takes" to rebalance the market.

"That type of verbiage is pretty extreme, and I think it inflated investor expectations into the event," Mr. Kettenmann said.

To be sure, few publicly predicted any of those things were likely to come to pass. But some investors may have gotten their hopes up anyway.

"Those kinds of reports or whether or not they were founded, get people excited. 'Oh, could there really be deeper cuts?'" said Nick Koutsoftas, a portfolio manager with Cohen & Steers. "I don't think the market observers are really appreciating the magnitude of these cuts and what it's going to do to the balance. To me is it's a little mind boggling."

The recent disappointment builds on increasing sentiment among investors that OPEC's ability to influence oil prices has greatly diminished, as other countries such as the U.S. and Canada have increased domestic production in response to higher prices.

"There's been very little success in the global picture," said Donald Morton, senior vice president at Herbert J. Sims & Co., who runs an energy-trading desk. "This market was holding by a thread."

The drop in oil prices dragged on the rest of the energy market as losses accelerated throughout the day. Gasoline futures reversed gains and closed down 2.6% to $1.6093 a gallon and diesel futures closed down 3.5% at $1.5509 a gallon.

Write to Stephanie Yang at stephanie.yang@wsj.com and Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

May 25, 2017 16:19 ET (20:19 GMT)