OIL PRICES SLIP AS DOUBTS ARISE OVER PRODUCTION CUTS

Oil prices slipped Tuesday morning as exuberance over an agreement by major oil producing countries to cut output gave way to doubts about how effective the deal will be.

U.S. crude futures fell 36 cents, or 0.68%, to $52.47  a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 38 cents, or 0.68%, to $55.31 on London’s ICE Futures Exchange.

The commitments by the Organization of the Petroleum Exporting Countries and non-OPEC nations to cut could help speed up the process of bringing oil supply and demand into balance, with the market likely to become undersupplied by the first half of next year if the promised reductions are delivered, the International Energy Agency’s monthly oil report said.

But the report also showed global oil supplies increased in November to 98.2 million barrels a day as rising OPEC output outweighed a drop in non-OPEC output. OPEC’s production rose 300,000 barrels-a-day last month to a record, even as members were negotiating pledges to cut back. Even Saudi Arabia, which drove the agreement to cut output, produced more, the agency said.

OPEC would now have to cut 1.7 million barrels a day to reach its target ceiling of 32.5 million barrels a day, more than the 1.2 million barrel-a-day cut it initially envisioned.

“There were definitely some bearish nuggets in there that threw cold water on a superheated OPEC story,” said Bob Yawger, director of the futures division of Mizuho Securities USA.

Oil’s move lower comes after an three session winning streak that sent prices to a new one-year high on Monday. The market got a shot of confidence after a deal struck over the weekend formalized the cooperation of countries outside of the OPEC cartel. Countries including Russia agreed to cut output by a combined 558,000 barrels a day. Reports that Saudi Arabia would be willing to take a deeper cut than the 486,000 barrel-a-day reduction it agreed to in November also boosted prices.

 

A pump jack oil rig near New Town, N.D., in November.ENLARGE
A pump jack oil rig near New Town, N.D., in November. PHOTO: ASSOCIATED PRESS

But members of the cartel have a spotty track record for adhering to production quotas, causing some doubt over whether the cuts will fully materialize. Removing excess barrels will lift prices, possibly into the target range of $60-$70 per barrel, but it would mostly hinge on the compliance of the producers who have been known to cheat, BMI Research said.

“We note that the higher the barrel price, the greater the temptation to break allocated quotas,” the firm said.

Higher prices could also lure U.S. shale producers to ramp up their own output, potentially undermining the benefits of the OPEC deal. The U.S. Energy Information Administration said Monday that U.S. shale production is likely to increase in January.

“It’s going to get tougher for the market to gobble up as much ground as it did yesterday,” said Gene McGillian, research manager at Tradition Energy. “The market could show continued strength—it’s just that as it attempts to push through yesterday’s high, there will be greater resistance until we see signs that there is no cheating,” or that U.S.  producers aren’t rushing back in.

Market participants are also looking ahead to the EIA’s weekly report on U.S. stockpiles, which will be released Wednesday morning. Last week’s report showed that oil inventories fell overall, but supplies at the Cushing, Okla., storage hub surged by 3.8 million barrels—the largest weekly increase since 2009.

Gasoline futures rose 0.17 cent, or 0.11%, to $1.5413 a gallon. Diesel futures fell 0.6 cent, or 0.36%, to $1.6657 a gallon.

WSJ

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