Oil Edges Down After Recent Strong Gains
Oil prices edged lower Tuesday but largely sustained gains that have brought crude futures to three-year highs.
U.S. crude futures fell 12 cents, or 0.19%, to $64.18 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, recently traded down 53 cents, or 0.75%, to $69.73 a barrel on ICE Futures Europe.
Brent on Monday closed above $70 a barrel for the first time since December 2014, helped by a depreciating U.S. dollar. A weaker U.S. currency makes dollar-traded oil less expensive for foreign buyers, generally strengthening crude prices as the greenback falls.
The recent rally has been fueled by tightening supplies after more than a year of cutbacks by the Organization of the Petroleum Exporting Countries and 10 other major exporters, along with unexpectedly strong demand and other unanticipated supply disruptions.
As a result, several banks have lifted their forecasts for crude prices this year. Bank of America Merrill Lynch now anticipates Brent prices to average $64 a barrel this year, compared with $56 previously. Société Générale is calling for Brent to average $62 a barrel, up from $58 previously, and said it expects U.S. prices to average $57.75, up from its previous forecast of $54 a barrel.
Still, the SocGen analysts cautioned that they believe prices are likely to tumble from current levels.
"Our view is that prices are overheated, and will correct lower," the analysts said. "We believe that the current situation, with strong uplift from fundamentals, non-fundamentals, and geopolitics all at the same time, is not sustainable. All three legs of the oil market stool have temporary factors built in right now, and these factors should ease."
Tuesday's downward move was largely due to profit-taking after several days of gains, analysts said. In addition, market participants are wondering whether weeks of declining oil inventories in the U.S. could be interrupted as refiners begin yearly maintenance, reducing their appetite for crude.
"I think the market is going to look to see if crude-oil inventories will rise over the next couple of weeks," said Andy Lipow, president of Lipow Oil Associates.
In addition, Chevron Corp. on Tuesday said it would soon resume drilling operations in Iraqi Kurdistan. The company had halted work there in October after Iraqi forces moved into Kirkuk following a Kurdish independence referendum.
The International Energy Agency and OPEC will release fresh monthly data later this week.
Gasoline futures edged up 0.32% to $1.8555 a gallon. Diesel futures recently traded down 0.18% to $2.0813 a gallon.
Write to Alison Sider at alison.sider@wsj.com and Christopher Alessi at christopher.alessi@wsj.com
Oil prices fell Tuesday, breaking a streak of gains and raising questions about whether oil's recent rally is running out of steam.
U.S. crude futures fell 57 cents, or 0.89%, to $63.73 a barrel on the New York Mercantile Exchange, breaking a five-session streak of gains. Brent, the global benchmark, fell $1.11, or 1.58%, to $69.15 a barrel on ICE Futures Europe, ending a six-session winning streak.
Tuesday's move lower was likely influenced by profit-taking after the recent string of gains, brokers and traders said. It comes as investors have become exuberant about oil's prospects, accumulating record high net bullish positions in both benchmarks. That kind of positioning can exacerbate selloffs, analysts said, if many investors get cold feet at the same time and rush to exit positions.
"If I were long, I'd be getting out here," said Michael Hiley, head of over-the-counter energy trading at LPS Futures LLC. "I tend to think this is pretty negative price action."
Oil's recent upswing has been fueled by tightening supplies after more than a year of cutbacks by the Organization of the Petroleum Exporting Countries and 10 other major exporters, along with unexpectedly strong demand and other unanticipated supply disruptions. Brent on Monday closed above $70 a barrel for the first time since December 2014.
Oil prices may have been pulled lower Tuesday by a stock market swoon. The Dow Jones Industrial Average surged above 26000 for the first time Tuesday but then retreated.
In addition, market participants are wondering whether weeks of declining oil inventories in the U.S. could be interrupted as refiners begin yearly maintenance, reducing their appetite for crude.
"I think the market is going to look to see if crude-oil inventories will rise over the next couple of weeks," said Andy Lipow, president of Lipow Oil Associates.
And with higher prices comes more production, something that could weigh on the market. The U.S. Energy Information said Tuesday estimates that shale output will rise by 111,000 barrels a day in February, according to the monthly drilling productivity report released Tuesday. North Dakota oil gas officials said Tuesday they expect the state's output to break a record in the first half of the year.
Still, many analysts expect that investors will buy the dip, at least for now.
"The bullish story is still intact," said David Leben, director of commodity derivatives at BNP Paribas.
Analysts at Goldman Sachs said Tuesday that they expect new supply from the U.S. to come eventually, but said there are still "upside risks" to their forecasts for Brent prices at $62 a barrel and West Texas Intermediate prices at $57.50 a barrel.
"We expect that producers, even if more disciplined, will ultimately respond to this price signal," they wrote. But "the lag of this response, inventories nearing normalized levels, upside risks to our optimistic demand forecasts, and an OPEC cut that may overshoot, however, all create risks that OECD inventories fall below our expectations of five-year average levels"
Several banks have lifted their forecasts for crude prices this year. Bank of America Merrill Lynch now anticipates Brent prices to average $64 a barrel this year, compared with $56 previously. Société Générale is calling for Brent to average $62 a barrel, up from $58 previously, and said it expects U.S. prices to average $57.75, up from its previous forecast of $54 a barrel.
But the SocGen analysts cautioned that they believe prices are likely to tumble from current levels.
"Our view is that prices are overheated, and will correct lower," the analysts said. "We believe that the current situation, with strong uplift from fundamentals, non-fundamentals, and geopolitics all at the same time, is not sustainable. All three legs of the oil market stool have temporary factors built in right now, and these factors should ease."
Gasoline futures fell 1.11 cents, or 0.6%, to $1.8384 a gallon. Diesel futures fell 2.16 cents, or 1.04%, to $2.0634 a gallon.
Write to Alison Sider at alison.sider@wsj.com and Christopher Alessi at christopher.alessi@wsj.com
(END) Dow Jones Newswires
January 16, 2018 17:28 ET (22:28 GMT)