Oil prices edged lower on Monday, as investors debated whether positive signs for supply and demand will be enough to keep a monthlong rally going.
U.S. oil futures have risen 16% since falling into bear market territory in June. Prices exceeded $50 a barrel for the first time in two months in July, but have been unable to hold above the closely watched level as supply concerns have seeped back into the market.
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Light, sweet crude for September delivery settled down 19 cents, or 0.4%, at $49.39 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 5 cents, or 0.1%, to $52.37 a barrel.
Rising production from the Organization of the Petroleum Exporting Countries, despite efforts to reduce output, has raised worries that members will be unable to keep to levels agreed on in a deal to cap production last year. The cartel will discuss compliance levels at a two-day OPEC meeting in Abu Dhabi this week.
"It was supply data that had bulls running for the exits last week," said Tamas Varga, oil analyst at broker PVM, in a Monday note. "Hopefully we will have some kind of clue as to how OPEC intends to manage these extra barrels by tomorrow."
Despite uncertainty over the OPEC deal's effectiveness, investors have been encouraged by falling crude inventories in the U.S. this summer.
In July, crude inventories fell by almost double the five-year average for the time of year. Stockpiles fell a total of 21 million barrels, and weekly data from the U.S. Energy Information Administration shows that inventory levels declined in seven of the past eight weeks ended July 28.
The S&P GSCI Energy Total Return index rose 8.1% last month, the best July performance since 2004 according to S&P Dow Jones Indices. Speculators also have returned to the market, as net bullish bets on crude oil have reached the highest level since March in the week ended Aug. 1.
"The biggest question now is, was that July rally just a lot of short covering, or does it have staying power?" said Mark Anderle, director of supply and trading at TAC Energy. "The market's just content to go sideways and figure that out."
Prices have gained on signs of slowing U.S. production as well, as additions to the oil-rig count have slowed. However, some investors are reluctant to add to positions near or above $50 a barrel, since higher prices could prompt U.S. shale to bring more projects online. Analysts at Citigroup said in a research note that U.S. oil producers already have started to take advantage of long-term prices hovering at or slightly above $50 a barrel to lock in 2018 prices.
"I do think $50 is the line of demarcation," said Rob Thummel, managing director for Tortoise Capital Advisors. "With oil below $50, producers in general are indicating that if we stay here at this price, we're going to have to reassess capital and not spend as much, so production won't be as high."
Even as oil prices have approached $50 a barrel, energy stock performance has remained muted. The S&P 500 energy sector is the worst performing group of stocks in the index, down more than 13% year to date.
Some exploration and production companies announced last week that they would trim spending in response to lower oil prices, but few were rewarded for their discipline, said Shawn Reynolds, portfolio manager at the VanEck Global Hard Assets Fund.
"It's a lose-lose. If you produce too much, oil prices will go down and that's bad. If you produce too little, you're not growing at the rate we thought and that's bad," he said. "This market is really, really down on the E&Ps."
Until oil is able to cross that threshold, the bullish sentiment may have hit its peak, traders said.
"Short-term, we're stuck," said Michael Hiley, a trader at LPS Futures LLC. "It's not a bearish market, but it's a market that brings crude supply...as it rallies."
Gasoline futures fell 1% to $1.6299 a gallon, and diesel futures lost 0.5% to $1.6398 a gallon.
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(END) Dow Jones Newswires
August 07, 2017 15:36 ET (19:36 GMT)