Oil Slides on Supply Glut
Crude futures fell to near-one-month lows Monday, erasing earlier gains that were spurred by a political rift in the Middle East, before investors refocused on the supply-glut.
Oil rose in early trade after Saudi Arabia and three other countries severed diplomatic ties with Qatar, but investors remain pessimistic about the oversupplied crude market and the gains petered out by late morning in London.
U.S. crude futures fell 26 cents, or 0.55%, to $47.40 a barrel on the New York Mercantile Exchange, dropping to their lowest settlement level since May 10. Brent, the global benchmark, dropped for a fifth straight session, falling 48 cents, or 0.96%, to $49.47 a barrel on ICE Futures Europe.
The move lower follows last week's slide of more than 4%, after investors were disappointed that the Organization of the Petroleum Exporting Countries didn't deepen its production cuts at their meeting on May. 25.
Saudi Arabia, Egypt, Bahrain, and the United Arab Emirates all cut ties with Qatar on Monday, accusing it of meddling in their internal affairs and backing terrorism.
Oil traders are sensitive to Middle East tensions because they worry about supply disruptions, although Qatar itself is a smaller producer than its neighbors. But the market quickly assessed that the tensions were unlikely to have an impact on oil supply, analysts said. No restrictions have been imposed on Qatar's oil shipments, officials said.
"You've had a knee-jerk reaction to the announcement and then prices came right back down," said Harry Tchilinguirian, oil strategist at BNP Paribas, adding that the market quickly assessed that the tensions were unlikely to have an impact on oil supply.
Market participants will be watching to see if Qatar, a member of OPEC, decides to disrupt the production cutback deal. Late last year, OPEC agreed to cut production by 1.2 million barrels a day to reduce a supply glut. Analysts noted that existing tensions in the group between Saudi Arabia and Iran had not prevented them from being able to come to an agreement, however.
"We do not think this has immediate implications for Qatar's OPEC deal participation," Helima Croft, global head of commodity strategy at RBC Capital Markets wrote in a research note. "Qatar remains firmly part of the coalition of the willing supporting the OPEC production cuts."
Meanwhile, investors are impatient to see the cuts help diminish global stocks. Gene McGillian, research manager for Tradition Energy, said prices could continue to tumble toward $45 a barrel.
"The worry in the market is that the overhang is definitely not going to be taken care of," Mr. McGillian said. "Unless OPEC wants to do something else, the idea of $50 or $55 oil is basically not realistic."
Sentiment deteriorated further last week after data from oil-field services company Baker Hughes Inc. on Friday showed U.S. oil drillers adding 11 more active rigs in the week ended June 2. That marked a 20th consecutive weekly rise.
U.S. crude production has averaged more than 9.3 million barrels a day for four straight weeks. The government now expects production to reach nearly 10 million barrels a day next year.
Gasoline futures fell 3.9 cents, or 2.47%, to $1.5381 a gallon. Diesel futures fell 2.55 cents, or 1.72%, to $1.4593 a gallon.
Write to Sarah McFarlane at sarah.mcfarlane@wsj.com, Jenny W. Hsu at jenny.hsu@wsj.com and Alison Sider at alison.sider@wsj.com
(END) Dow Jones Newswires
June 05, 2017 16:16 ET (20:16 GMT)