Oil Prices Wane After Output Cap Extension

Oil prices started the week down Monday, as the market appeared to look past OPEC's agreement late last week to extend its crude production cuts through the end of 2018.

Brent crude, the global benchmark, was down 0.75%, at $63.25 a barrel on London's Intercontinental Exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were down nearly 1%, at $57.79 a barrel.

The Organization of the Petroleum Exporting Countries and a group of non-OPEC producers led by Russia agreed Thursday to extend a deal to hold down crude output by nearly 2% through the end of 2018. But the participants said they would reassess market conditions in June to decide whether to continue with the cuts.

"The price reaction to the OPEC decision was relatively muted," said Olivier Jakob, head of oil consultancy Petromatrix. "The price reaction has been very limited because there is nothing that has really changed."

Oil market observers had widely expected OPEC and Russia to prolong the deal, which was first agreed a year ago. At that time, OPEC and a coalition of other producers pledged to cap production at around 1.8 million barrels a day below peak October 2016 levels, with the aim of alleviating a global supply glut and boosting prices. The plan went into effect at the start of 2017 and was extended in May through March 2018.

Initially, the deal did little to lift prices. But in the second half of 2017, higher compliance with the pact and a combination of stronger macroeconomic fundamentals, tighter demand and an emergent geopolitical risk premium helped to drive prices up. Prices have advanced roughly 20% since September.

"Barring any unexpected bearish supply development and assuming strong compliance, oil prices are unlikely to fall significantly in coming months," said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd., in a note. "Ignoring geopolitics, the $55-$65 a barrel price bandwidth seems reasonable for the coming six months."

Among refined products, Nymex reformulated gasoline blendstock--the benchmark gasoline contract--was up 0.67%, at $1.74 a gallon. ICE gasoil, a benchmark for diesel fuel, changed hands at $539.75 a metric ton, down 1.41% from the previous settlement.

Write to Christopher Alessi at christopher.alessi@wsj.com

Oil prices fell as the market appeared to look past OPEC's agreement late last week to extend its crude production cuts through the end of 2018.

U.S. crude futures fell 89 cents, or 1.53%, to $57.47 a barrel on the New York Mercantile Exchange. Brent crude, the global benchmark, fell $1.28, or 2.01%, to $62.45 a barrel on ICE Futures Europe -- its biggest daily drop since Oct. 6.

The moves reversed gains after the Organization of the Petroleum Exporting Countries and a group of non-OPEC producers led by Russia agreed last week to extend a deal to hold down crude output by nearly 2% through the end of 2018.

But higher prices could spur higher production from places such as the U.S. and Canada, something that could cap price increases.

"It seems as if as WTI gets close to $60 and Brent pushes toward $65, worries that some of the cuts will basically be offset by the production expected to come seems to take some of the wind out of the sails of the market," said Gene McGillian, research manager at Tradition Energy.

In the second half of 2017, higher compliance with the pact and a combination of stronger macroeconomic fundamentals, tighter demand and an emergent geopolitical risk premium helped drive prices up. Prices have advanced roughly 20% since September.

But now some analysts say there are few catalysts to push prices higher in the near term.

Oil market observers had widely expected OPEC and Russia to prolong the deal, which was first agreed a year ago with the aim of alleviating a global supply glut and boosting prices. The plan went into effect at the start of 2017 and was extended in May through March 2018.

Hedge funds and other speculative investors piled into bets on rising prices: their net bullish position in U.S. crude futures was the second highest on record last Tuesday, just before OPEC's meeting, according to data from the Commodity Futures Trading Commission. Net long positions -- or bets that crude prices will rise -- held by speculative investors have also reached a record for Brent.

That helped drive rising oil prices in recent weeks, but some analysts said this positioning has made the oil market vulnerable to a rapid selloff.

"The OPEC extension, tightening inventories and healthy global demand have justly rallied crude prices to current levels; however from here we expect a lack of bullish drivers to weigh on prices," analysts at Macquarie wrote Monday. "We view high net length as a concern and see price risk as skewed to the downside."

And investors are also anticipating that demand for fuel will slow, as it usually does in winter. Donald Morton, senior vice president at Herbert J. Sims & Co., said traders are expecting government data this week to show increases in fuel inventories. And traders who rely on algorithms to put on short-term trades have been liquidating bullish positions, accelerating the selloff, he said.

"A lack of any significant bullishness in the weekend let the bears regain control they were looking for," Mr. Morton said.

Still, some said losses are likely to be limited as long as OPEC and its allies are holding output off the market.

Gasoline futures fell 4.94 cents, or 2.84%, to $1.6922 a gallon. Diesel futures fell 4.68 cents, or 2.41%, to $1.8945 a gallon.

Write to Alison Sider at alison.sider@wsj.com and Christopher Alessi at christopher.alessi@wsj.com

(END) Dow Jones Newswires

December 04, 2017 17:13 ET (22:13 GMT)