Oil Prices Wane After Output Cap Extension

12/04/17 11:47 AM EST
By Christopher Alessi and Alison Sider 

Oil prices fell 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.

U.S. crude futures recently trade down 75 cents, or 1.29%, to $57.61 a barrel on the New York Mercantile Exchange. Brent crude, the global benchmark, fell 92 cents, or 1.44%, to $62.81 a barrel on ICE Futures Europe.

"A lack of any significant bullishness in the weekend let the bears regain control they were looking for," said Donald Morton, senior vice president at Herbert J. Sims & Co., who oversees an energy trading desk.

Mr. Morton 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.

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.

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.

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 prior to 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."

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

"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."

Gasoline futures fell 3.59 cents, or 2.06%, to $1.7057 a gallon. Diesel futures fell 3.63 cents, or 1.87%, to $1.9050 a gallon.

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


(END) Dow Jones Newswires

December 04, 2017 11:47 ET (16:47 GMT)

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