Oil's Rally Pauses in Holiday Trading

Oil's longest rally in years paused Tuesday, as investors continue to weigh tentative signs that U.S. production is slowing.

In thin trading around the Fourth of July holiday in the U.S., global oil benchmark Brent crude fell 7 cents, or 0.14%, to $49.61 a barrel on London's ICE Futures exchange, breaking an eight-session streak that was its longest rally since 2012. West Texas Intermediate, the U.S. benchmark, edged higher in abbreviated electronic trading, but there was no settlement price due to the holiday.

Oil prices had gained about 11% in the previous eight sessions. That rally has been U.S. crude's longest run of gains since a 10-session streak that ended Jan. 6, 2010.

Now investors are looking to this week's U.S. government report on oil output and stockpiles, which will be out Thursday instead of the usual Wednesday because of the holiday.

Crude slid into bear market territory in June, falling more than 20% from this year's February highs amid worries that a rebound in U.S. output was offsetting supply cuts by OPEC and other exporters and would continue to weigh on the market. Three years after oil prices began their steep decline, many American shale drillers have adapted by focusing on their best acreage and making technological improvements that allow them to continue pumping even as the price stays relatively low.

But U.S. producers may not have ramped up earlier this year as quickly as many in the industry thought, and they may now be slowing down. U.S. data late last week showed that production in April fell, contrary to the increase that preliminary weekly production figures had shown, and the number of rigs drilling for crude fell for the first time since January.

Even though the decline was a small one -- the rig count ticked down by just two last week -- some see the drop as a sign that shale producers wouldn't be able to keep up the relentless pace of drilling at prices below $45 a barrel. On Monday, U.S. crude rose to $47.07.

"If prices stay low, we're going to see capex cuts. We're going to start dropping rigs," said Rob Thummel, managing director for Tortoise Capital Advisors.

The evidence that shale producers are slowing remains modest and preliminary. Much of the production decline in April came from the Gulf of Mexico, where maintenance work weighed on output.

Also, investors have seen oil prices rise before on the belief that U.S. production was falling. Those higher prices then motivated the shale industry to step up production again, keeping crude within a range.

After prices fell to decade lows early last year, U.S. drillers idled rigs and output hit a low of under 8.5 million barrels a day by the summer. That, coupled with the OPEC cuts later in the year, pushed the price back up. But as prices rose, American producers ramped up again, increasing their production to above 9 million barrels a day by February this year, and putting pressure on the market once more.

Further complicating the efforts to drain the glut, oil may be flowing faster in other parts of the world. Analysts at consultancy JBC Energy estimate that OPEC's crude production rose by 210,000 barrels a day in June. More than half of the increase was due to the startup of several fields in Libya, which is an OPEC member but exempt from their output deal. Tepid demand growth is also undermining analysts' belief that the price rises will sustain through this year.

And some say the recent rally has been more technically driven than less of a sign of a tectonic shift. Trading was light ahead of the holiday Tuesday in the U.S. Some analysts said the rally was likely driven more by investors closing out bets on falling prices than by new bets on rising prices.

Going forward, "the market will be looking at the relationship between prices and rig counts and ultimately production," said Tom Pugh, a commodities analyst at Capital Economics. "Everybody is watching what happens in the U.S."

Write to Alison Sider at alison.sider@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

July 04, 2017 17:56 ET (21:56 GMT)