Oil prices FALL on skepticism over OPEC & strong dollar

Oil prices fell Tuesday on continued skepticism about OPEC and from a surge in the dollar.

Light, sweet crude for November delivery settled down 12 cents, or 0.3%, at $48.69 a barrel on the New York Mercantile Exchange, ending a four-session winning streak. Brent, the global benchmark, lost 2 cents, or 0.04%, to $50.87 a barrel.

The market has been buoyed by a tentative agreement from the Organization of the Petroleum Exporting Countries to cut output to between 32.5 million and 33 million barrels a day. But gains have been capped by skepticism about OPEC’s willingness to follow through.
It will still be weeks before OPEC leaders meet again to complete the deal. Several member countries and Russia — one of the world’s other big exporters — keep raising output or show signs they are poised to.

The dollar also rose sharply Tuesday, often bad for the price of oil and other commodities traded in dollars. A rising dollar can make oil more expensive for traders who conduct business in other currencies. The Wall Street Journal Dollar Index, which tracks the dollar against a basket of other currencies, recently gained 0.6% amid a more optimistic outlook for U.S. interest-rate increases.

As the dollar shot up in early trading, oil’s “rally immediately faltered and did so quite dramatically,” said John Saucer, vice president of research and analysis at Mobius Risk Group in Houston.

Others are simply selling on OPEC skepticism. There is a divergence between the physical and paper markets, according to Olivier Jakob. The analyst from the Switzerland-based Petromatrix said the physical market is still oversupplied, whereas the paper market was now pricing in OPEC’s commitment to lower production to as low as 32.5 million barrels a day.

“Nigeria and Libya are looking to bring more crude into the market, and this is why the recent rally was relatively modest,” Mr. Jakob said. “We had higher prices in June without the aid of an OPEC production cut agreement.”

Even if they complete a deal there are questions about OPEC’s ability to police production cuts, especially when some members won’t be part of the agreement. Several are receiving exemptions.

In a note, Norbert Rücker, head of commodities research at the Zurich-based bank Julius Baer, pointed to OPEC’s poor record at enforcing quotas. He added that given the unlikelihood of OPEC reducing output to a level that could truly impact physical supply coupled with U.S. shale oil producers ramping up extraction as prices approached $50 a barrel, a return to $45 a barrel was probable.

Despite the small losses Tuesday, prices are up 9% in a week, since the day before OPEC members met in Algeria and discussed the deal. Bullish analysts point to a growing urgency from Saudi Arabia—widely seen as OPEC’s de facto leader and the world’s swing producer. The country’s leadership is facing an expensive war in Yemen and concerns about declining middle-class living standards as oil income falls.

“Economic and geopolitical problems…have reached a boiling point that would have eventually led to a major geopolitical disruption within the producing nations of the Middle East,” Peter Cardillo, chief market economist at First Standard Financial, said in a note. “We think whether there is an actual reduction or a freeze of production, the news should not be taken lightly.”

The firm is looking for prices between $50 and $55 a barrel by year’s end. U.S. oil could breach $50 a barrel by the end of the week, said Scott Shelton, broker at ICAP PLC. He pointed to a string of large weekly declines in U.S. stockpiles, which suggest a longstanding oversupply is starting to wane.

“We drew 24 million barrels in September in the U.S. You can’t ignore that,” he added.

The U.S. Energy Information Administration gives its official update on Wednesday mornings.

The American Petroleum Institute, an industry group, said late Tuesday that its own data for the week showed a 7.6-million-barrel decrease in crude supplies, a 2.9-million-barrel increase in gasoline stocks and a 1.3-million-barrel decline in distillate inventories, according to a market participant.

Gasoline futures gained 2.91 cents, or 2%, to $1.4996 a gallon, its highest settlement since Aug. 26. Diesel futures gained 0.12 cent, or 0.1%, to $1.5544 a gallon, its ninth gain in 11 sessions, pushing it to its second highest settlement of the year.