Oil Prices Dropped as Oversupply Concerns Return

Andrew Cummings
May 15, 2017

Brent futures gained 72 cents, or 1.5 percent, to settle at $49.10 a barrel, while U.S. West Texas Intermediate crude climbed 70 cents, or 1.5 percent, to close at $46.22 per barrel.

Prices on Thursday marked the lowest settlement since November 29-the day before the Organization of the Petroleum Exporting Countries announced an agreement to limit production by 1.2 million barrels a day.

Oil prices bounced back from five-month lows sustained in the previous session, after Saudi Arabia's OPEC Governor Adeeb Al-Aama said OPEC and non-OPEC nations were close to agreeing a deal to extend the supply-cut agreement for an additional six-months.

OPEC in its upcoming meeting on May 25 in Vienna will take a call on whether an extension cut is needed, however, below are the reasons which make a production cut extension imminent.

Russia, contributing the largest production cut outside OPEC, said as of May 1, it had cut output by more than 300,000 bpd since hitting peak production in October.

Both Brent and WTI futures are down about 17% so far this year, despite OPEC efforts to support prices.

They have collapsed 9.3 percent this week, sliding to the lowest level since November 15 past year - two weeks before OPEC signed a six-month deal to curb production aimed at easing a global glut.

However the latest Reuters survey of OPEC production showed the country's compliance had fallen slightly.

Brent traded volumes yesterday reached a record high of almost 542,000 contracts, suggesting that hedge funds had accelerated reductions to their long positions.

The US data and some investors "losing faith with Opec" are not helping the oil price, said Abhishek Deshpande, an oil analyst at Natixis.

Pierre Andurand, who runs one of the biggest hedge funds specialising in oil, liquidated his fund's last long positions in oil last week and is running a very reduced risk at the moment, a market source familiar with the development said.

Brent crude, the worldwide oil benchmark, dropped 4.8% to $48.38 a barrel in London on Thursday. "They either put up a defence here or risk further emboldening the bears for a run at the US$40 threshold (for WTI)".

The market is awaiting weekly data at about 1pm on the U.S. oil drilling rig count, which has risen for 15 straight weeks.

US crude stockpiles fell less than expected last week, while gasoline inventories grew as demand remained weak, the Energy Information Administration said on Wednesday, keeping concerns about global supply on a simmer.

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