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Why oil is plunging even after OPEC extended its landmark output-cut deal
By MarketWatch | May 25, 2017

U.S. traded oil is down more than 4% on Thursday

OPEC agreed to extend production cuts through the first quarter of next year, as many had expected, but in traders’ eyes that wasn’t enough.

Members of the Organization of the Petroleum Exporting Countries agreed to keep their output-cut deal in place through March of next year, that generally matched market consensus, but still disappointed some who were looking for a longer time frame or larger cuts.

Reports of the nine-month extension had come out hours ahead of the official announcement, with prices dropping in reaction to it.

OPEC was “very transparent in telegraphing these cuts ahead of the meeting and markets have likely already priced in the impact of these extensions,” said Maxwell Gold, director of investment strategy at ETF Securities.

“This is why we haven’t seen an enthusiastic response in crude prices following the news of the deal,” he said, adding that he expects oil prices to remain in the range of $40 to $55 a barrel this year.

In Thursday trading, July West Texas Intermediate crude CLN7, -5.16% dropped $2.08, or 4%, to $49.28 a barrel on the New York Mercantile Exchange. July Brent crude LCON7, -5.00% lost $2.05, or 3.8%, to $51.91 a barrel on the ICE Futures exchange in London. Both benchmarks were poised for their lowest settlements since May 16, according to FactSet data.



Rollar coast ride for WTI oil futures on Thursday

Thirteen OPEC members agreed late last year to cut collective production at the start of 2017 by 1.2 million barrels a day for six months. Non-OPEC producers, including Russia, also agreed to cut their output by another, roughly 600,000 barrels a day. The reductions were implemented at the start of this year and set to expire at the end of June.

OPEC members Libya and Nigeria remain exempt from the cuts. Meanwhile, OPEC on Thursday added Equatorial Guinea as a new member—lifting its membership to 14 nations.

On Thursday, there was “no gravy train for oil traders who expected to capitalize on the oil production cut following OPEC’s meeting,” said Naeem Aslam, chief market analyst at Think Markets.

Aslam said that the important thing is “not about how long the OPEC cartel plans to maintain the production cut.” Instead it’s about “ability to delivery and striking a balance with the U.S.,” he said.

“The gloves are off,” he said. “Shale oil producers on the other side of the Atlantic have the advantage of pumping unrestricted amount of oil,” they are not afraid to do so.

U.S. shale ‘mystery’

How high production can go in the U.S. remains uncertain, but output from producers in the region has been cited as a main headwind to oil’s price being lifted higher by any agreement to limit global production.

“The key unknown is the flexibility and competitiveness of the U.S. shale-oil sector,” said Omar Al-Ubaydli, a program director at the Bahrain Center for Strategic, International and Energy Studies. “Until U.S. shale oil technology progress stabilizes, if at all, the key threat to OPEC will remain shrouded in mystery.”

Still, during a news conference Thursday, OPEC President and Saudi Energy Minister Khalid al-Falih said that seven weeks of declines in U.S. crude supplies and drops in floating oil storage are “excellent” news.

Adam Rozencwajg, managing partner at Goehring & Rozencwajg Associates, meanwhile, said that it’s “fascinating that no one sees global oil inventories drawing.”

The International Energy Agency over the last four months have shifted their thesis, with numbers from the agency, “once doomsayers about oversupply,” now “telling a different story about a looming deficit.”

In a report issued in May, the IEA said that “rebalancing” in the oil market is “essentially here, and in the short term at least, is accelerating.”

“Just like a rubber band, the tighter inventories get, the higher prices will travel,” said Rozencwajg. “We are seeing a repeat of 2008.” WTI futures prices hit all-time highs above $147 that year.

For now, however, some analysts suggested that the trend in the oil market may not change much, at least in the short term, following the OPEC decision.

“We believe there are limits to U.S. production at current prices, particularly with some evidence from producers of rising marginal investment costs for new wells,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle. But “low interest rates and solid demand for high-yield debt are going to help producers continue to invest and grow production for now.”

Given all that, “we believe oil prices are likely to remain range bound between rising U.S. production on the high side and OPEC production cuts on the low side,” said Haworth.

The joint OPEC and non-OPEC ministerial monitoring committee will continue to monitor market conditions and hold a meeting in two months in Russia.

OPEC’s next ordinary meeting is set for Nov. 30.

http://www.marketwatch.com/story/why-oil-is-plunging-even-after-opec-extended-its-landmark-output-cut-deal-2017-05-25

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