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.
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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.
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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.
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(END) Dow Jones Newswires
May 25, 2017 16:19 ET (20:19 GMT)