Oil Prices Recover Slightly, but Glut Fears Persist

By Christopher Alessi, Jenny W. Hsu and Timothy Puko Features Dow Jones Newswires

Oil prices inched up Friday, but the market is still headed down for the week and holding near its lowest levels of the year because of the lingering glut.

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U.S. crude for July delivery recently gained 26 cents, or 0.6%, to $44.72 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, gained 39 cents, or 0.8%, to $47.31 a barrel on ICE Futures Europe.

For the week, though, U.S. prices are down 2.5% and global prices are down 1.8%, both on pace for their fourth-straight losing week.

Prices were getting some "minimal support" Friday morning from a slightly weaker dollar and higher investor risk sentiment, according to Giovanni Staunovo, a commodity analyst at UBS. Traders who bet on falling prices are also likely closing out trades ahead of the weekend, which would help prices as they buy back contracts they sold, said Gene McGillian, research manager at Tradition Energy.

"It's the end of the week and people like to take some money up," he added."

But both Mr. McGillian and Mr. Staunovo cautioned that likely increases in global production could push prices down by the end of the day.

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Oil fell more than 5% in each of the past two weeks, and futures have dropped a further 3% so far this week, hitting seven-month lows. More declines could be in the offing depending on weekly U.S. drilling-rig data later Friday from Baker Hughes. The active oil-rig count has risen for 21 straight weeks.

Increased U.S. oil production this year has hampered efforts led by the Organization of the Petroleum Exporting Countries to get global inventories back to their five-year average. Production cuts, which started in January, haven't yet had much success on that front, resulting in the output caps being extended until March. But some analysts have said that even then, supplies may still be above OPEC's goal.

"I don't think we can talk about a serious recovery," said Eugen Weinberg, head of commodity research at Commerzbank. "There is a risk of low prices going forward" because of continued oversupply and an increase in U.S. production, he added.

Mr. Weinberg said the "slight recovery" Friday morning was largely aided by speculative buying on the heels of the "messy prices fall" on Wednesday. Both Brent and West Texas Intermediate, the U.S. price setter, fell almost 4% Wednesday to their lowest levels of 2017.

"It is no shoo-in that oil's losing streak is coming to a halt. While the demand outlook is on track for a much-needed boost over the coming months, pervasive doubts over the oil market rebalancing will linger without confirmation that the supply overhang is waning," according to a note released Friday morning by PVM.

Earlier this week, the International Energy Agency offered a grim forecast that a gusher of new supplies from the U.S. stands to keep the market well-flushed for some time.

The U.S. Energy Department echoed that sentiment on Thursday, saying that some inventory declines through summer may nudge prices higher the next few months, possibly resulting in even-higher domestic output in 2018 than currently anticipated.

This year's rebound in U.S. oil production and a 17% drop in prices have drawn harsh criticisms about OPEC's wisdom in implementing the output cuts. "By setting impossible objects, by promising unreachable targets, OPEC ministers only managed to further motivate U.S. producers," said Mohab Kamel, a trader at Geneva-based Magma Oil.

Stronger-than-expected production rebounds in Nigeria and Libya, two OPEC nations exempt from cutting their output, have also kept global supplies flush. Their increases have effectively halved the OPEC cuts, said London-based consultancy Energy Aspects.

In refined product markets, gasoline futures were up 1.2% at $1.4523 a gallon, and diesel futures were up 1% at $1.4293 a gallon.

Write to Christopher Alessi at christopher.alessi@wsj.com, Jenny W. Hsu at jenny.hsu@wsj.com and Timothy Puko at tim.puko@wsj.com

near its lowest levels of the year because of the lingering glut.

Light, sweet crude for July delivery settled up 28 cents, or 0.6%, at $44.74 a barrel on the New York Mercantile Exchange. Brent crude, the global benchmark, gained 45 cents, or 1%, to $47.37 a barrel on ICE Futures Europe.

That wasn't enough to overcome large losses from earlier this week, leaving U.S. prices down 2.4% and global prices down 1.6% over the last five sessions. Both are no on fourth-week losing streaks, the longest for U.S. oil since December 2015 and for global oil since November.

Prices got "minimal support" Friday morning from a slightly weaker dollar and higher investor risk sentiment, according to Giovanni Staunovo, a commodity analyst at UBS. Bargain buyers probably also helped, as did traders who successfully bet on falling prices then closing out trades ahead of the weekend, analysts said.

"People come in and buy because they think that's a pretty low price," with U.S. oil near $44 a barrel, said Andy Lipow, president of Lipow Oil Associates in Houston. "But in the physical market we're seeing more ominous signs."

Oil fell more than 5% in each of the past two weeks, and hit seven-month lows earlier this week. U.S. companies are drilling and producing more, and the weekly rig count from Baker Hughes Inc. reported an increase for the 22nd-straight week.

That has hampered efforts led by the Organization of the Petroleum Exporting Countries to get global inventories back to their five-year average. Production cuts, which started in January, haven't yet had much success on that front, resulting in the output caps being extended until March. But some analysts have said that even then, supplies may still be above OPEC's goal.

"I don't think we can talk about a serious recovery," said Eugen Weinberg, head of commodity research at Commerzbank. "There is a risk of low prices going forward" because of continued oversupply and an increase in U.S. production, he added.

Mr. Weinberg said the "slight recovery" Friday morning was largely aided by speculative buying on the heels of the "messy prices fall" on Wednesday. Both Brent and West Texas Intermediate, the U.S. price setter, fell almost 4% Wednesday to their lowest levels of 2017.

"It is no shoo-in that oil's losing streak is coming to a halt. While the demand outlook is on track for a much-needed boost over the coming months, pervasive doubts over the oil market rebalancing will linger without confirmation that the supply overhang is waning," according to a note released Friday morning by PVM.

Earlier this week, the International Energy Agency offered a grim forecast that a gusher of new supplies from the U.S. stands to keep the market well-flushed for some time.

The U.S. Energy Department echoed that sentiment on Thursday, saying that some inventory declines through summer may nudge prices higher the next few months, possibly resulting in even-higher domestic output in 2018 than currently anticipated.

This year's rebound in U.S. oil production and a 17% drop in prices have drawn harsh criticisms about OPEC's wisdom in implementing the output cuts. "By setting impossible objects, by promising unreachable targets, OPEC ministers only managed to further motivate U.S. producers," said Mohab Kamel, a trader at Geneva-based Magma Oil.

Stronger-than-expected production rebounds in Nigeria and Libya, two OPEC nations exempt from cutting their output, have also kept global supplies flush. Their increases have effectively halved the OPEC cuts, said London-based consultancy Energy Aspects.

Gasoline futures gained 1.91 cents, or 1.3%, to $1.4548 a gallon. They lost 4.69 cents, or 3.1%, for the week, their eighth losing week of the past 10.

Diesel futures rose 1.24 cents, or 0.9%, to $1.427 a gallon. They lost 0.42 cent, or 0.3%, for the week, the fourth-straight losing week.

Write to Christopher Alessi at christopher.alessi@wsj.com, Jenny W. Hsu at jenny.hsu@wsj.com and Timothy Puko at tim.puko@wsj.com

(END) Dow Jones Newswires

June 16, 2017 16:03 ET (20:03 GMT)