Oil Futures Slump Anew as Market Doubts Build

By Jenny W. HsuFeaturesDow Jones Newswires

Crude futures slumped anew in midday Asian trading, falling 3% in minutes, reflecting fast-deteriorating confidence in ongoing production cuts.

Prices tumbled nearly 5% as of Thursday's settlement in New York, putting oil at its lowest levels since late November, when the Organization of the Petroleum Exporting Countries agreed to cut output for six months. After nearly eight hours of subsequently steady trading, prices started to slightly ease before slumping shortly after 0300 GMT.

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No immediate catalyst was identified, but "the selloff means Asian investors are resonating with the bearish sentiment saw overnight in New York," said Gao Jian, an energy analyst SCI International. He estimated price could drop another dollar or two before staging a mild rebound.

In recent trading, light, sweet crude futures for delivery in June was down 3% at $44.16 a barrel in the New York Mercantile Exchange's Globex electronic session. July Brent crude on London's ICE Futures exchange fell 2.6% to $47.12. Both are now down some 10% this week; such declines if held through Friday's New York settlement haven't been seen since January 2016.

Nymex reformulated gasoline blendstock for June was down 1.5% at $1.4579 a gallon while June diesel dropped 1.6% to $1.3869 and ICE May gasoil skidded 2.5% to $415.50 a metric ton.

The OPEC-led production cuts haven't yet made a dent in robust global inventories, and a decision due late this month on whether the production caps get extended--or even increased--hasn't given much support lately to oil prices.

It was foreseen that the OPEC cuts would prompt American shale producers to pump more, but the rebounding output has surpassed analysts' expectations. U.S. production has averaged more than 9 million barrels a day each of the past 11 weeks.

After holding the post-deal price gains through February, oil has seen pullbacks since--capped by this week's slide. "OPEC's failure to raise oil prices is fundamentally linked to their failure to bring down petroleum inventories," said Bernstein.

With the production cuts, the cartel aims to reduce global stockpiles to their five-year average, a goal that is only attainable if the cuts continue, industry insiders say. As such, most believe an extension is a forgone conclusion. The pressing question is for how long and who is on board.

Investors began selling overnight after Reuters reported OPEC members aren't interested in deepening the current cuts. Moreover, some estimates show that four months into the deal that OPEC's total production is still above the agreed cap of 32.5 million barrels a day thanks to rising output from Angola and Nigeria, based on a S&P Global Platts survey. OPEC's official production report is due Thursday.

Russia's non-committal stance is also an irritant. For now, the world's largest oil producer has apparently delivered on its pledges to cut daily output by 300,000 barrels. It remains to be seen if Russia will back an extension.

But not all market watchers are nervous.

Bernstein said investors should be patient because the effects of the cuts will soon materialize. Already, there are signs that stockpiles in developed economies declined in April. Meanwhile, a significant drop in oil exports from OPEC members should also "result in meaningful inventory drawdowns over the coming months," the firm added.

The current rate of cuts, said Citi Futures analyst Tim Evans, is sufficient to result in demand outstripping global output by 1 million barrels a day in the second half of 2017 as seasonal demand picks up.

Write to Jenny W. Hsu at jenny.hsu@wsj.com

(END) Dow Jones Newswires

May 05, 2017 00:13 ET (04:13 GMT)