Oil Down on Investor Skepticism Over Production Cuts

By Neanda Salvaterra and Jenny W. Hsu Features Dow Jones Newswires

Oil prices fell Wednesday as investors remained skeptical that production cuts by major producers will make a dent in global crude stocks.

Continue Reading Below

Brent crude, the global oil benchmark, fell 2% to $51.19 a barrel on London's ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures for July delivery were trading down 1.9% at $48.71 a barrel.

Oil futures have remained depressed since last week's decision by the Organization of the Petroleum Exporting Countries and other producers like Russia to extend a joint supply cut through March 2018.

Analysts noted that although Saudi Arabia, one of the world's biggest oil exporters, continues to talk about the need to reduce global stocks, OPEC's official statement on the extension of the supply cut only mentioned "the importance of continuing efforts to help stabilize the oil market."

"That shows there is somehow less commitment from all OPEC members to target a rebalancing of the stocks to the five-year average," said Olivier Jakob from the Switzerland-based consultancy Petromatrix. "It seems like certain members do not want commit themselves to a policy that sets certain targets for stock levels."

OCBC economist Barnabas Gan said that the fact that WTI still trades below $50 suggests "the market remains unconvinced that OPEC's production cuts are sufficient to balance the supply glut."

Continue Reading Below

The initial OPEC-led production cuts have so far done little to cut global inventories. The initial price jump after OPEC's original deal six months ago helped encourage new U.S. drilling activity and oil production rebounded after a decline in 2016.

The latest data from the Energy Information Administration had U.S. production averaging 9.3 million barrels a day, 6.3% higher than year-earlier levels. The increase is hardly a surprise given oil drilling has risen for 19 straight weeks, analysts say. Readings for last week will come Thursday, and S&P Global Platts is predicting an eighth straight week of declines in U.S. oil inventories.

Investors will watch for an estimate on Wednesday from the American Petroleum Institute, an industry group that forecasts production and stock levels.

Still, market watchers now say prices need to stay weaker for longer, more specifically below $50, in order to effectively impede U.S. shale companies from investing further in oil production.

Nymex reformulated gasoline blendstock--the benchmark gasoline contract--fell 1.6% to $1.60 a gallon. ICE gasoil changed hands at $451.50 a metric ton, down $5.75 from the previous settlement.

Write to Neanda Salvaterra at neanda.salvaterra@wsj.com and Jenny W. Hsu at jenny.hsu@wsj.com

Oil prices tumbled Wednesday as investors remained skeptical that production cuts by major producers will make a dent in global crude stocks.

The sharp downturn follows last week's decision by the Organization of the Petroleum Exporting Countries and other producers like Russia to extend a joint supply cut through March 2018.

While that move was widely anticipated, many investors were betting that the producers would be even more aggressive as they aim to work off a glut that has weighed on the market for nearly three years.

At the same time, Libya, a member of OPEC that is exempt from the agreement to cut production, is once again ramping up output, according to its National Oil Corp.

U.S. crude futures fell $1.64, or 3.3%, to $48.02 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell $1.82, or 3.51%, to $49.82 a barrel on ICE Futures Europe.

Investors had bet heavily on rising oil prices heading into OPEC's meeting last week. Money managers increased their net bullish position on U.S. oil prices by nearly 20%, according to data from the Commodity Futures Trading Commission.

Now they are unwinding those bets, said Donald Morton, senior vice president of Herbert J. Sims & Co., who oversees an energy trading desk.

"Everyone took the long position going into the meeting, and are now in liquidation," he said. "It's more post-OPEC blues."

Many investors had begun to expect OPEC would agree to even deeper reductions in output. OCBC economist Barnabas Gan said that the fact that WTI still trades below $50 suggests "the market remains unconvinced that OPEC's production cuts are sufficient to balance the supply glut."

The initial OPEC-led production cuts have so far done little to cut global inventories. The initial price jump after OPEC's original deal six months ago helped encourage new U.S. drilling activity and oil production rebounded after a decline in 2016.

"The U.S. and OPEC are on a tandem bicycle. OPEC decided to coast for a while to see if U.S. tires out. We're showing no signs of that," said Adam Wise, senior managing director of natural resources at John Hancock Financial Services. "U.S. producers became extremely efficient in doing more with less."

The latest data from the Energy Information Administration had U.S. production averaging 9.3 million barrels a day, 6.3% higher than year-earlier levels. The increase is hardly a surprise given oil drilling has risen for 19 straight weeks, analysts say. Readings for last week will come Thursday, and S&P Global Platts is predicting an eighth straight week of declines in U.S. oil inventories.

Investors will watch for an estimate on Wednesday from the American Petroleum Institute, an industry group that forecasts production and stock levels.

Gasoline futures fell 4.46 cents, or 2.72%, to $1.5943 a gallon. Diesel futures fell 4.38 cents, or 2.83%, to $1.5056 a gallon.

Neanda Salvaterra and Jenny W. Hsu contributed to this article.

Write to Alison Sider at alison.sider@wsj.com

(END) Dow Jones Newswires

May 31, 2017 11:37 ET (15:37 GMT)