Oil Down on Investor Skepticism Over Production Cuts

Oil prices tumbled to three-week lows Wednesday, extending their recent slide as investors remained skeptical that production cuts by major producers will make a dent in global crude stocks.

U.S. crude futures fell $1.34, or 2.7%, to $48.32 a barrel on the New York Mercantile Exchange -- their lowest since. Brent, the global benchmark, fell $1.53, or about 2.95%, to $50.31 a barrel on ICE Futures Europe.

Brent's 2.75% decline during May marked its fifth straight month of losses. U.S. crude futures ended the month down about 2.05%.

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.

"The market has become quite impatient on seeing results from the production cuts over the last six months," said Andy Lipow, president of Lipow Oil Associates in Houston.

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.

Many investors had begun to expect OPEC would agree to even deeper reductions in output, and are now 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."

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."

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. Investors are concerned that rising output from Libya and Nigeria, which is also exempt, could further undermine OPEC's efforts.

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. Analysts, brokers and traders surveyed by The Wall Street Journal are anticipating that U.S. crude stocks fell by 2.5 million barrels, on average.

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 2.67 cents, or 1.63%, to $1.6122 a gallon. Diesel futures fell 3.41 cents, or 2.20%, to $1.5153 a gallon.

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

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